Marketing is so pervasive these days that it is often hard to distinguish between truth and the self-serving positioning. The financial services industry has long played a tacit game regarding costs, where product manufacturers and distributors downplay the importance of cost in order to maximize revenues. The inescapable truth is the more a product or service costs, the less the purchaser makes. Your grandma was right when she said, “A penny saved is a penny earned”.

I was at a professional development presentation recently. A presenter in attendance flat-out told the advisors who were present not to compete on price. He said this even though pretty much every study that’s ever come out on the subject demonstrates that cost and performance correlate negatively. More specifically, he said:”If you’re playing the price game, you’re selling Cobalts and Geos”. He basically wanted the advisors in the room to position themselves as the sorts of people who sell BMWs and Lexuses.

You are what you sell, apparently.

These high-end advisors purport to be highly professional, obviously. Remember that STANDUP is an acronym for Scientific Testing And Necessary Disclosure Underpin Professionalism. Where’s their disclosure regarding the critical importance of cost? Is it being mandated by the industry through NI 81-406?

Anyone who wants to be thought of as a premium brand advisor and earns a premium brand sort of income, ought to be able to charge accordingly. Collectively, the professions are a meritocracy and if segments of the client market are willing to pay a premium for a value-adding service, then that’s evidence of proper market segmentation. However, given that money management is a value-subtracting service on the whole, why are so many advisors actively encouraging their clients to buy high cost products?

Again, cost and performance correlate negatively and although past performance is not a reliable predictor of future performance, current costs are an excellent predictor of future costs.

It seems to me that if advisors are genuinely serious about putting their clients’ interests first, they’d at least be telling them about and recommending low cost products. Clients get to keep what they don’t spend and it goes straight to their bottom line.

As John Bogle says,”You get what you don’t pay for”. Here’s the problem in a nutshell:

  • cost (for both products and services) is hugely important
  • advisors want to position themselves as high value adders
  • collectively, all products subtract value
  • no one can reliably identify the few that might add value
  • in general, the more products cost, the more value they subtract

That’s the irony of all this. The advisors who position themselves as being a”high-end brand” often end up having clients that drive Geos and the advisors who position themselves as being price-conscious are often the ones who save their clients enough money that they can afford those BMWs.

In a perverse world where advisors who recommend BMW-like products have clients that drive Geos and advisors that recommend Geo-like products have clients that drive BMWs, marketing has surely overtaken truth in explaining advisor recommendations. Last I checked, high cost cars were more of a status symbol than high cost investment products.