It is hard to remember back now to 2008 and what it felt like to be in the eye of the storm of the Global Financial Crisis. Rationally we can say with hindsight that it was the worse financial crisis and global recession since the Great Depression of the 1920’s. We also know now that Central Banks would step in and secure the system by pumping huge amounts of our tax money into the economy. The benefit of hindsight is that we know that the global economy then went on a huge bull run and investments of most kinds rocketed in value.
If you can remember back to 2008 though, you can probably remember that in the midst of the chaos we didn’t know what the future would hold. There were days when it looked as though the cash I had from selling my house would be lost forever, ten years of working and saving gone in a matter of days. It seemed some days as though government systems were likely to collapse. Some people spoke about the end of capitalism as we know it.
It felt existential at times.
The biggest problem most advisers had during this period was talking their clients off the ledge. Repeatedly telling them that ‘this too shall pass’ as it always had done in the past. Often this would be in the face of a daily diet of social media and media news scare stories about the end of the world. This was the most important advice that an adviser could give during this period. Selling investments and moving to cash after markets had crashed would have impoverished these clients.
So imagine an adviser who was completely stressed out because she too was coping with all of the above and was watching her business income drop (by as much as half in this period). This adviser is probably the last person to be able to talk her clients off the ledge, as she was probably the first one out there originally.
If you choose to pay your financial adviser a percentage of your wealth, their income will fall sharly in periods of serious market decline . They may be a robot and completely zen in such tough trading periods for their business but this probably also makes them a terrible adviser when you are coping with a major life upheaval.
The reality is that we are all human, with human emotions and fears. Advisers are no different. You can engage with an adviser who will remain more rational and less under pressure by paying them a flat, monetary rather than a percentage. This is the same way you are likely paying for most other goods and services.
Why the financial advice profession remains so addicted to such a volatile income stream is anyone’s guess. It’s like a gambler’s addiction but in this case the gamblers know that the house usually loses (markets rise 75% of the time).