If you want to understand a person’s behavior, look no further than at what they are incentivized to do. In fact, this is perhaps the only way to understand how, over the course of the last 5+ years, more than 5,300 Wells Fargo employees managed to open over 2 million unauthorized accounts for their customers. Given the overall scale of the operation (5,300 employees!!), it is not surprising the attention this story has received. But how did the world’s largest bank by market cap find itself under such intense scrutiny? The answer is in the incentives created by the bank’s “boiler room” sales culture.
Any time you tie someone’s pay, or their career, to a certain outcome — you can be certain you will receive more of that outcome. In this case, high sales targets, paired with the disincentive of corporate shaming, led to what sums up to be consumer fraud. And while this rightfully has received a lot of publicity, Wells Fargo is far from the only guilty party. In recent months, Morgan Stanley, American Century, and Ameriprise all have received negative publicity for similar practices. To be clear: it’s a problem.
As a consumer, what should you take from this? The answer begins with awareness. Be aware of what conflicts of interest may be present in any business arrangement. Understand that employee incentives can sometimes cloud objectivity. Don’t take anybody’s word as truth without first asking the tough questions — “Why are you selling me this?” “Why is it the best solution?” “What conflicts of interest exist in this relationship?”
And this goes far beyond finance and banking. Car salesmen, real estate agents, and even your waiter at dinner last night, each has their own set of incentives driving their behavior. By taking proactive measures, you can protect yourself from making costly decisions. At the end of the day, you are the one facing the consequences of the decisions you make — don’t let someone else’s biases dictate those decisions.
I do believe that people are generally good-natured. The problem lies in our incentive based culture and the blinders these create. In fact, I haven’t met a single financial advisor who would say they don’t put their client’s best interests as top priority. But as time passes, and people forget about the Wells Fargo scandal, there will undoubtedly be another occurrence of consumers getting the short end of the stick. And once again, the ultimate root of the problem could be traced back to incentives and conflicts of interest that arise from them.
As a fee-only financial planner, we pride ourselves in the proactive measures that we take to reduce these conflicts of interest. By eliminating product based sales, we can see the client’s situation clearly, and without blinders. We have no financial incentive to do anything other than serve our clients, and in the best way possible. But until the rest of the industry follows suit, you owe it to yourself to ask the tough questions and ensure that you and your family do what’s in your best interests, not somebody else’s.
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