If you went out to buy something and came home with something more expensive than what you originally planned, you’ve been up-sold. According to Wikepedia (link),
“Up-selling is a sales technique whereby a salesman attempts to have the consumer purchase more expensive items, upgrades, or other add-ons in an attempt to make a more profitable sale.”
I usually have my anti-up-selling guard up and don’t even listen to the extended warranty offers. What I didn’t expect was being up-sold at the doctor’s office. I recently went to an optometrist for an eye exam. After the exam, I picked out a frame. The doctor’s assistant measured the distance between my pupils with a nifty tool. Then she dropped the up-sell hint. “I recommend polycarbonate lenses for you because you have a strong prescription.” She paused, perhaps sensing something was wrong, and then looked at my prescription. Oops, wrong script. I have almost the weakest prescription one can get. I usually don’t wear glasses. I need them only when I’m reading something far away. She was just BS’ing me into buying something more profitable to them.
This experience reminds me of the book Freakonomics. It says when one party of the transaction has more or better information than the other, the other party is at a disadvantage. It’s called information asymmetry. When I’m at a doctor’s office, I’m a patient. I want to trust that my doctor knows how to treat me and what my best options are. I don’t expect to be up-sold to whatever makes the most money to the doctor. It’s a tough situation to be in. A $25 upgrade to polycarbonate lenses is not a big deal. I took it for some other benefits. But if my doctor recommended an operation for me, how do I know if it’s not only because the doctor wanted to operate on me for a fee?
The same goes for using a financial advisor. There is a big conflict of interest in that relationship. If the client knows enough about what’s good for them, they don’t necessarily need an advisor. If the client doesn’t know squat, they are often taken advantage of, like in the story of $10,000 lesson on VUL. I hate to be cynical but when everybody is selling, it’s tough to trust anyone.
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Interesting post. But there are advisor/client relationships that are relatively conflict-free such as the fee-based Registered Investment Advisor model. It has also been my experience that the folks who think they are well-informed in financial planning topics are the ones making the biggest mistakes.
Sounds like the woman at the optometrist’s office used to work fast food- would you like fries with that?
Harry Sit says
@thc re: fee-only RIA model
Yes, the fee-only (not fee-based) RIA model helps. Even under that model, there can be conflicts of interests. The person I mentioned in the VUL story runs a small business. He’s in the highest tax bracket. His fee-only RIA had him buy DFA taxable bond funds. He’s better off in either a Treasury ladder or a muni bond fund. Why did the RIA use taxable bond funds? I don’t know. Could it be (1) the DFA funds are easier for the advisor to buy or they help qualify the RIA for a status with DFA; or (2) the taxable funds show a higher pretax return so the advisor look better on the performance reports?