Beware the hidden agendas of financial 'experts'

John W. Schoen Senior producer • Profile • E-mail

There are a lot of differing opinions and advice from financial 'experts' about where stocks and the economy are headed. How do you tell who's right?

Though no one knows what tomorrow will bring, I am perplexed by the vast difference of opinions from well-known and experienced professionals concerning the timeframe for the economic recovery. ... I guess my question is the same as everyone’s because I want to get back into my mutual funds. But I am suspicious of the guests on the stock market shows. It seems to me they have a hidden agenda to be so optimistic. Is it even possible for you to comment on the wide difference of opinions from professionals?
-- Keith W., Address withheld

I watch the same TV guests you do, and I have the same questions about their agendas. I guess I would say that if you look closely enough, those agendas aren't all that hidden.

The financial services industry — which includes real estate agents, mortgage brokers, lenders, stock and mutual fund salesmen (aka "financial advisors") — has an enormous vested interest in restoring the confidence of people like you and me in the products they sell and the advice they provide. No matter how personable, intelligent, honest or trustworthy they may be, they are making a living selling a product.

As millions of consumers have learned the hard way, many of these products and much of the advice turned out to be seriously flawed. After losing trillions of dollars in housing wealth and retirement savings, consumers are rightly leery of stepping in to "buy on the dips" — whether it's a home selling for 30 percent less than its peak price or a stock that is touted as the “bargain of a lifetime.”

The first question to ask yourself when you listen to one of these supremely confident forecasts is how does the forecaster get paid? Some conflicts of interest are pretty clear. A car salesman is not likely to volunteer all the recalls and known defects for the model you're asking about. But you know that when you step into the showroom, and you take appropriate steps to balance the pleasant patter with your own research from independent sources.

For some reason, consumers who will dicker for the last $50 off the price of a new car don’t think twice about following the advice of a stranger on TV — or worse, turning over their life savings to a “financial adviser” based on nothing more than a magazine ad or referral from a friend. Investors turned their hard-earned retirement savings over to money managers who, on average, don’t even keep up with the return of stock market indices. Home buyers signed dozens of pages of imponderable mortgage documents based on little more than a real estate agent or mortgage broker’s soothing reassurance that home prices “never go down.”

There may be a couple of reasons for this. First, financial services professionals have done everything they can to obfuscate the process of borrowing and investing by creating a jargon-filled lexicon that puffs up their supposed expertise, overstates the complexity of what they're selling and puts their clients on the defensive. All that risk management modeling, interest-only negative amortization, asset allocation rebalancing and second derivative negative correlation analysis turned out to about as valuable as a share of bank stock.

Further, it’s still very difficult to identify the conflicts of interest that sank borrowers and investors of all shapes and sizes in the latest market collapse. When you hear a TV “expert” talking up the idea of buying stocks, for example, you’re likely hearing optimism about a decision they’ve just made about buying for their own portfolio. A money manager who has just “sold short” (betting stocks will go down) is more likely to express a bearish view. Disclosing these facts doesn’t cure the conflict of interest.

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