August 25, 2012


Lance's new wheelsIncentives affect behavior.

Lance Armstrong wanted to win but doping got in the way. Jonah Lehrer wanted to rule the book/speaking circuit but plagiarism and lies got in the way. Your advisor has goals too but do you know what gets in the way?


Success attracts sponsors
  • Nike for Lance Armstrong, Tiger Woods, Lolo Jones
  • Condé Nast (publisher of Wired and The New Yorker) for Jonah Lehrer
  • Big firms for advisors with sales ability
It’s difficult for the sponsors to admit their mistakes. You could predict Nike’s pledge of ongoing support for Lance who helps by claiming he’s innocent.

Outsized Rewards

Incentives encourage bad behavior — especially when winners get outsized rewards. Being the fastest cyclist in the Tour de France means something. Number two may try harder but why would we pay them with our ever-so-scarce attention? There’s such pressure to win … at all costs.

Lolo Jones had sponsors like Red Bull and Oakley but didn't win a medal in the 2012 Olympics. Practicing 12 years for a 12 second race and losing? That's not compelling. Sponsors may stick by her until the 2016 games or start looking for more promising prospects.

Cheating doesn't seem as serious a crime as getting caught — especially if competitors might be flexible with the rules. Unfortunately, passing a drug test does not prove innocence.

Smaller Rewards

Advisors at large firms are commissioned employees. They have rules to follow. In exchange, they get the support of a big brand. How is their performance measured? Revenue, rather than service. They have pressure to perform. For them, doping mean selling products which generate higher revenue (e.g., mutual funds instead of ETFs, whole life insurance instead of term life). They might not make you aware of less expensive alternatives, especially if they don't sell them.

The Truth

The truth about what Lance did may never be known. The suspicions will remain and taint the innocent.

While the financial sector ranks at the bottom in trust (Edelman Trust Barometer 2012), there are good advisors and good firms. The onus is on them to show they are exceptions. We can't spot the worthy without transparency. This starts with the advisors.

Penn and Teller reveal the magic behind the magic as only insiders can. Advisors can be transparent too. They can reveal the tricks and show that they don't use them. For instance, by
  • showing what they are licensed to sell
  • showing all forms of compensation they receive (including referral incentives)
  • showing the magnitude of the compensation (e.g., a pie chart showing the percentages from different sources)
  • showing what others leave out
Actions like these remove doubts about whether an advisor is on your side. The same goes for celebrities, athletes and politicians. As an insider, what did Lance do spotlight and stamp out doping by other cyclists?

The Saddest Part

As spectators, we reward the best. As consumers, we compromise. We'll pick an advisor without knowing their performance. Yet an advisor has a much bigger impact in our lives. We don't need the best in the world, but what's wrong with rewarding advisors who are among the best in serving their clients where you live?


Podcast 183

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PS Lance could apologize and tell the truth.

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