Important advice when investing, buying life insurance, getting a mortgage, refinancing, buying a home etc: know that you are dealing with a salesman.

A stock broker is a salesperson. Mutual funds use sales people. A life insurance broker is a sales person. All are trying to sell to you. Understand this important dynamic in all financial dealings.

(Note: I mostly use “he,” “man,” “salesman” and other variations of the masculine. This is not because the topic is about men only, but because of the awkwardness of “he/she,” “salesman/saleswoman” and other related ways of trying to write around this issue.)

Sales People Must Sell

When a person goes into the business of selling investments, or selling advice about them, he must sell what his prospective clients think is good, or he won’t have much income.

If his customers are poorly informed, he cannot educate them suddenly and still make a living. Sales people and buyers with similar ideas tend to gravitate together. A stockbroker finds his customers mostly among investors who already own stock. He cannot rapidly gain new customers from investors who do not invest in stocks.

A salesperson can sell investments without knowing much about them. He can do OK with a pleasing or imposing personality, plus a bit more knowledge or gift of gab than his customers have. A conscientious salesman tries to enlarge his own knowledge of what he is selling, and to raise the standards of his customers. If he can collect a group of customers who appreciate his efforts, he might be successful.

But probably an easier way to build up sales is to play on customers’ weaknesses. Life-insurance agents often aim at a man’s emotion, his fear of death, his love of his family, and his desire to make them “secure.” Apparently many life insurance salesmen don’t even bother to find out what other insurance companies offer, let alone know whether an entirely different type of investment might be better for the buyer.

A stockbroker or adviser can earn more fees if a customer buys and sells frequently rather than if he holds on to investments for a long time. So it is not surprising when a broker yields to the temptation to work on a customer’s desire to gamble or to get rich quick.

It is not necessary for the salesman to carefully estimate what will happen in the future with the stock he wants to sell. His main sales argument may be some stories of how greatly a man’s capital would have multiplied if he had bought certain stocks at just the right time, years ago.

Advertisements and published articles on investing also use arguments of the sort just described .

Many people love to be associated with big names in whatever they do. To this type of customer a salesman of most any sort of investment may say: “Henry Jones, who as you know is president of the largest corporation in town, has invested $500,000 in this.” The implication is that anything good enough for Mr. Big, must be OK for the little fellow. The question whether Mr. Big knows anything about investing does not arise.

A salesman working in an organization earns his income only by selling what his outfit offers. If he wants to hold his job and be promoted, he must make big sales. So naturally he is tempted to overload his customers with the items offered by his organization. He cannot afford to offer impartial advice. To feel better he convinces himself that he is selling the best for his customers under all circumstances.

Once a salesman has established himself in one organization, changing to another outfit may be quite difficult, and may cut his income severely. So regardless of his private opinions, he keeps selling for the old company.

A stockbroker can have considerably more leeway in what he can recommend profitably than can the representatives of most other types of investment. He can make a commission on a customer’s purchase or sale of any one of some tens of thousands of stock and bond issues. But he is still subject to temptation to urge a customer to buy or sell whatever will give the broker or dealer the most commission.

When a financial organization has a method that builds up a good volume of business, the management is apt to adopt that method as gospel. When first established, maybe the plan was the best available. But as time passes, other methods are launched and improved by other institutions, until eventually it becomes evident to an impartial observer that the old method is terribly out of date. But meanwhile, the organizations using the old method have developed an enormous volume of business and prestige. An officer of one of these companies may realize that his outfit is selling what is now an investment of dubious quality, but he is mired in a rut, unwilling to make a major change for fear it will hurt sales. Unfortunately, this scenario fits many financial institutions of various types, but especially the life-insurance industry.

It is not merely the little, ordinary investors who suffer from lack of good advice. Plenty of wealthy people, and trustees of funds running into many millions of dollars, are too egotistical or lazy to seek information, and fall victim to salesmen who are greedy or ignorant.



Finding Good Advice

Now suppose an investor really wants information on the best available investments, or life insurance, or mortgage. How to get it? Ask the handiest sales person, or broker, or some business executive, the advice will probably be mediocre to poor.

A careful investor must either locate one of the minority of salesmen or investors who have learned how to obtain first-class results, or else he must do the necessary studying himself.

Gathering information about corporate stock is greatly simplified by examining the records of investment companies. Their performance offers a standard for comparison, even though an investor does not buy their shares. Information about them is easily obtained, much of it being available free of charge. It is not so easy, however, to research such products as life insurance or mortgages.