HOW TO SPOT BIASED REFERRALS

Once we got a flat tire on Highway 401 at night. We got towed to a tire shop that the tow truck operator recommended. Did he receive a financial incentive?
While site-seeing in India, our driver took us to see silk comforters at a particular store. Did he receive a financial incentive?

Fruits

When you go to an Apple store, you won't get advised to buy an Android tablet. You already know this. You wouldn't expect a bias at a place like Best Buy which sells both. You'd be annoyed if you found out that hidden inducements came ahead of your best interest.

When you’re referred to someone else for help — accountant, lawyer, coach, investment advisor, insurance advisor, financial planner, plumber — could hidden incentives bias the recommendations?

Some networking groups expect members to refer prospects to each another. This requirement may not be visible or disclosed. This is also a reason to be skeptical of testimonials on LinkedIn, but there spotting overlaps may be easier.

Financial Services

In financial services, there are many one-stop shops — perhaps where you bank or invest. They offer everything except carpet cleaning. That’s convenient for you and more profitable for them. However, your results might be suboptimal compared with hiring independent specialists who are good enough to have their own brands.

See Spot Run

Asking questions like these helps you uncover biased referrals.

1. Where would you recommend I go?
   If they can't or won't recommend anyone, be wary since they lack courage. A list of options falls in this wimpy category. If they say they're recommending the best place, be wary. “Best” may mean for them ...
2. Where else have you recommended that others go?
   You may find that referrals keep going to the same place. This is especially true in a one-stop shop. There are probably much better choices outside but only internal referrals are allowed.
3. How long have you known them? How did you meet? Why did you select them?
   Here the goals are to find out about the depth and nature of the relationships.

Ask in a conversational tone. The answers and delivery will help you gauge the value of the advice.

Buried

In some situations, hidden incentives may influence the recommendations you get. As a minimum, there are probably cross-referrals: I'll recommend you if you recommend me. Money might change hands. This is more likely in smaller organizations. The bigger places are more likely one-stop shops, which has other drawbacks. Even if you're informed about the payments, there may be an element of bias in the recommendations.

You may be comfortable with referral fees (or "affiliate marketing") as long as the payments get disclosed clearly ... in advance ... without you asking.

Recently, I've been looking for better ways to back up my data online. Some providers got glowing reviews but mainstream sites never even mentioned them. Maybe some incentive is affecting the recommendations?

The Fairest Way

At their core, referrals are fine. You probably give them already. If you know a good advisor (for example), why wouldn’t you send a friend or acquaintance to them? You all win.

You know your own motives. When you receive referrals, be wary. Even when you think you trust the source.

Links

• The foolproof measure of trust
• The word advisors imply but dare not say
• How advisors fool you (and what you can do)
• Case study: the doctor the insurance advisor mistreated
• The cost of getting advice from your banker
• Reasons to be cynical
• How to visit India
• image courtesy of Maxim Kulemza (Russia)

Podcast 155

direct download | Internet Archive page | iTunes

PS Have you been fooled in the past?

THE LURE OF “EXCLUSIVE” FINANCIAL STRATEGIES

A log by any other name is still a generic section of wood from a tree. How do you sell that? You need the power of marketing.

Salespeople like having an edge like exclusivity or innovation to stand out from their competition.

The consumer world places a premium on the exclusive or innovative. The special edition. Limited quantities. Get it first.

In the financial world, deviating from convention has consequences. We already looked at the risk of financial innovation (podcast 142). This time, we’ll explore the lure and allure of “exclusive” strategies using examples from the world of insurance.

Examples

Advisors like wrap product configurations into packages called strategies. For instance,

• the family cottage preserver: use life insurance to pay the capital gains tax due upon the death of both parents
• the retirement asset conserver: use life insurance to pay the tax on RRSP savings at death
• the investment multiplier: instead of investing in interest-bearing investments, buy the biggest death benefit possible

We looked at the top five insured strategies earlier  also how to turbocharge them by adding investment leveraging. Different companies will have their own names. Some advisors create their own names too. While the name may not be available anywhere else, the exclusivity is an illusion.

A Rose

A rose by any other name would smell as sweet
— William Shakespeare

When you buy a strategy, you ultimately get a normal life insurance policy from one of the few insurers left (ideally one good at keeping promises). You could buy the identical coverage without a strategy. When you receive annual statements from the insurer, you rarely find references to the strategy.

Advisors may be unable to show you how the strategy works when it matters most — years after you’ve bought. There's little incentive to service policies already sold unless there's a good chance of selling more insurance. Also, the tools are designed to make the initial sale. Later, when real life interferes with the alluring projections, there isn’t much help available.

Generic

While a strategy may look unique, the tools used often come from an insurance company or third party. This means that other advisors can often produce the same results.

This is good.

Strategies rely on numbers which depend on formulas and assumptions. Mistakes are easier to make than spot and correct. Even mainstream applications like Windows contain bugs. Your advisor won’t have the resources of Microsoft.

Exclusive

Who says that what you're seeing is one-of-kind? Besides the salesperson and their team.

Steve Jobs was able to draw people into his Reality Distortion Field and have them believe that whatever he was then promoting was the best thing ever. Your salesperson may not have quite the same charisma but there are parallels. We want to believe. We want to feel special. That makes us vulnerable. What if you’re being fooled?

Risk

Ice cream comes in many flavours but vanilla remains the most popular (29%) followed distantly by chocolate (8.9%) and butter pecan (5.3%). You might want to try chocolate marshmallow salsa almond crunch that only one place sells. That’s fine. Go wild.

For financial strategies, do you really want something unique? You might get more peace of mind and better results with the boring and proven.

Links

• The risk of financial innovation
• Why after-sales service stinks for life insurance
• How to evaluate a proposal from an advisor
• How advisors fool you (and what you can do)
• The fine print taketh away
• The top 15 ice cream flavors (The Food Channel)
• image courtesy of Szabo Borka (Hungary)

Podcast 154

direct download | Internet Archive page | iTunes

PS If an advisor asks you to sign a Nondisclosure Agreement, back away.