How The Financial Advice And Management Industry Manipulates You Into Overpaying For Questionable Expertise

by: Erik Conley

Six proven ways to influence and persuade people to buy what you're selling.

Take it from someone who spent 30-plus years in the investment advice and management industry. You are being manipulated, and in some cases you are being taken for a ride.

The following six principles are from psychologist Robert Cialdini's ground-breaking 1984 book titled "Influence: The Psychology of Persuasion." In it, he lists and describes in detail, the six main areas of influence and persuasion that salespeople use to gain the trust and confidence of clients and prospects, with the ultimate goal of making the sale.

There is nothing evil or subversive about these selling techniques, but a smart investor (or a consumer of any product or service) will benefit greatly by keeping in mind that in every sales situation, there is practiced manipulation going on. The better informed and prepared you are for these gambits, the better you can protect yourself from overpaying, or buying something that is worthless.

Here are the six primary ways that sales professionals (and politicians) try to influence and manipulate their targets.

  1. The first way is by taking advantage of the human instinct of Reciprocation
    1. From childhood we're taught that if we receive a gift or a kindness, we should give something in return.
    2. When a financial salesperson gives away a free dinner at an upscale restaurant, or sends you an "exclusive" report on a stock or an investment strategy, many of us will feel an obligation to listen to what the salesperson has to say.
  2. The second way is by employing the time-honored concept of Social Proof.
    1. Club-goers are attracted to the places that have the longest lines, believing that the crowd must know that there is something very cool going on inside the club.
    2. At high school dances across America, most boys want to dance with the girl whose dance card is filled.
    3. Financial salespeople use testimonials from highly satisfied customers to create the impression of Social Proof, and it works, even though they cherry-pick the examples.
  3. Commitment and Consistency
    1. This is a rather weighty idea, but it is extremely powerful as an influence tool.
    2. People like to act consistently, and when we've committed to something either verbally or in writing, we don't like to back out. We don't want to appear wishy-washy, and we don't like disappointing others, even if they are simply trying to sell us something.
    3. Salespeople take advantage of this human tendency by getting us to say "yes" to a series of questions that start out harmlessly ("You want to send your kids to college, don't you Mrs. Smith?") And end up asking for a serious, long-term financial commitment ("Just sign here and I'll get started right away on making your financial dreams come true!")
  4. Know, Like, and Trust
    1. People are more vulnerable to salespeople who are attractive, or who are similar to themselves, or who give them compliments.
    2. Having a "pleasant" demeanor is something that is taught in every sales training seminar.
    3. Salespeople are taught to look for attributes in their prospects that they can mimic, and create the impression that they feel, think, or believe the same things that the prospect is articulating.
    4. A skilled salesperson will convince you that he understands the challenges you face. He tells you that he recognizes and shares your preferences, whether it's true or not.
  5. Authority
    1. Most people respect authority. They want to follow the advice of "real experts".
    2. Financial salespeople are trained to present an air of authority to prospects, often by speaking in unintelligible jargon. If a prospect dares to challenge the expertise of the salesperson, she risks being exposed as an uninformed amateur and subjected to passive-aggressive ridicule or disdain.
    3. This is why financial salespeople load their business cards with titles like "Senior Financial Consultant," "Certified Financial Planner," and "Vice President, Wealth Management."
  6. The sixth proven aid to successful persuasion is Scarcity.
    1. The less there is of something, the more valuable it seems, and the more people want it. The more they want something, the more they are willing to pay for it.
    2. The Deadline gambit: You have to buy before a certain date in order to get the discount.
    3. The Limited Offer gambit: You have to act quickly because there is a limit to how many customers will be allowed to participate in the offer.
    4. Aversion to missing out on something that will attract an ever-increasing and rabid following in the near future.

Here's the bottom line. Financial experts like advisers, brokers, planners and wealth managers have one thing in common. They all know the principles of influence, and they have been trained in these specific skills. The ones who excel at these skills usually end up with the most client assets under management.

Since the business model of the investment advice and management industry is to reward those who gather the most assets, rather than those who deliver the best outcomes to their clients, the business will remain sales-driven and not results-driven.

The best thing that you, as a consumer, can do about this is to ask the salesperson a simple question. "If I can get a 9% annual return by simply buying and holding a low-cost, diversified index fund, what is the value that you will add, and how much will it cost me?"