On your journey to financial freedom, you will inevitably need the help and services of others - brokers, insurance agents, property agents, 3rd party investment services, education providers, fund managers, various websites etc.
The key to understanding whether someone is going to help or hinder your journey is through understanding their agenda. An agenda is a person's motivation to do something. Why are they offering that service? Why are they willing to help you? What's in it for them?
Now, having an agenda might sound ominous, but the fact is everybody has an agenda for doing something. What we need to find out is, does this agenda align with our interests, be neutral to our interests, or does it impede it?
For example, there are 2 different types of forex brokers out there, ECN (Electronic Communication Network) brokers and non-ECN brokers. ECN brokers will take your orders and send it into the general pool of orders to get filled and they make their money through commissions you pay. Non-ECN brokers open an opposite trade to your trade and make money through wider spreads and when you lose money. Both these brokers are providing a service to make money off you, but the non-ECN broker's agenda is clearly going against our own objectives of making money. The ECN brokers are not angels either, they don't care whether you profit or lose, but at least you can be fairly sure they won't go out of the way to make sure you fail.
Thinking about agendas also helps you to set your own expectations right. Take insurance agents and financial planners for example. Their agenda usually involves earning commissions off customers who purchase plans with them. This does not mean they are evil, they are being paid for the service of introducing to you these plans and explaining the details to them. However, it does mean that if you trust your insurance agents and financial planners fully and do not think for yourself what the pros and cons of purchasing a plan are, your expectations of a good outcome several years down the road will very unlikely be met.
Understand that when the service provider's interests are not aligned with yours, the only person that will actively ensure a good outcome is you. If that is the case, you will need to put in the appropriate amount of effort and not leave your fate to be decided by someone that is not incentivised to care.
The key to understanding whether someone is going to help or hinder your journey is through understanding their agenda. An agenda is a person's motivation to do something. Why are they offering that service? Why are they willing to help you? What's in it for them?
Now, having an agenda might sound ominous, but the fact is everybody has an agenda for doing something. What we need to find out is, does this agenda align with our interests, be neutral to our interests, or does it impede it?
For example, there are 2 different types of forex brokers out there, ECN (Electronic Communication Network) brokers and non-ECN brokers. ECN brokers will take your orders and send it into the general pool of orders to get filled and they make their money through commissions you pay. Non-ECN brokers open an opposite trade to your trade and make money through wider spreads and when you lose money. Both these brokers are providing a service to make money off you, but the non-ECN broker's agenda is clearly going against our own objectives of making money. The ECN brokers are not angels either, they don't care whether you profit or lose, but at least you can be fairly sure they won't go out of the way to make sure you fail.
Thinking about agendas also helps you to set your own expectations right. Take insurance agents and financial planners for example. Their agenda usually involves earning commissions off customers who purchase plans with them. This does not mean they are evil, they are being paid for the service of introducing to you these plans and explaining the details to them. However, it does mean that if you trust your insurance agents and financial planners fully and do not think for yourself what the pros and cons of purchasing a plan are, your expectations of a good outcome several years down the road will very unlikely be met.
Understand that when the service provider's interests are not aligned with yours, the only person that will actively ensure a good outcome is you. If that is the case, you will need to put in the appropriate amount of effort and not leave your fate to be decided by someone that is not incentivised to care.
Why this works
The reason we use 3rd party service providers is to help us with an aspect that we either cannot do, have difficulty with or do not want to spend the resources learning to do. When the service provider's interests are aligned with yours, many times any problems that come along are resolved without us even knowing of their existence. We need this to happen as we are likely not familiar with how to solve the problems in the first place.
Aligning the interests of service providers with our own does not eliminate bad things from happening, but it does ensure that when bad things do happen, it is either not the fault of the service provider, or the service provider is actively trying to prevent the bad thing from happening or minimizing the impact.
Aligning the interests of service providers with our own does not eliminate bad things from happening, but it does ensure that when bad things do happen, it is either not the fault of the service provider, or the service provider is actively trying to prevent the bad thing from happening or minimizing the impact.
How-to guide
Sometimes it is not easy to understand the agenda of a service provider. Even if you ask them directly, you might not get a clear answer, especially if there is malicious intent. I find one of the best ways to figure out the true agenda of a service provider is to ask the question "Would he still do it if X is not happening?".
For example, if you invest your money in a hedge fund, the typical fees are 2% flat + 20% of profits. This fee structure looks like it is aligned with the investor, due to the 20% profit sharing. However, if the 20% of profits does not materialize, will the hedge fund still offer to invest your money? If the answer is yes, that might not be their true agenda.
Another method is to do your own research. For example, if you are trying to select a broker, look at their annual reports to see where their revenue comes from. Is it mainly from commissions or do they have other prominent revenue streams? If a large part of their revenue comes from trading using their client's money, you might want to avoid that brokerage, as a market turn might bankrupt that broker and wipe your account with no fault of your own.
At the end of the day, it may not be possible find service providers that have their interests 100% aligned with yours. When the interests are not fully aligned, what we need to do is to step up our own active involvement to ensure our own objectives are met.
For example, if you invest your money in a hedge fund, the typical fees are 2% flat + 20% of profits. This fee structure looks like it is aligned with the investor, due to the 20% profit sharing. However, if the 20% of profits does not materialize, will the hedge fund still offer to invest your money? If the answer is yes, that might not be their true agenda.
Another method is to do your own research. For example, if you are trying to select a broker, look at their annual reports to see where their revenue comes from. Is it mainly from commissions or do they have other prominent revenue streams? If a large part of their revenue comes from trading using their client's money, you might want to avoid that brokerage, as a market turn might bankrupt that broker and wipe your account with no fault of your own.
At the end of the day, it may not be possible find service providers that have their interests 100% aligned with yours. When the interests are not fully aligned, what we need to do is to step up our own active involvement to ensure our own objectives are met.