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Advisors who buy what they sell
When veteran insurance salespeople tell me stories from the 1970s and 1980s of how they bagged the big life policy sale, they often recount how they demonstrated their commitment to the product by buying it themselves. Is this merely a sales tactic, or should advisors really be expected to buy what they recommend to their clients?
Eating one's own cooking: appeal vs. merit
Anybody in sales is bound to say something like, "I bought this myself" to prove to the prospective buyer that the seller is convinced of the product's benefits. This has natural appeal to investors because they would think that if it's good enough for the advisor, then s/he must truly believe in the product's investment merit.
While its appeal is obvious, is this approach valid? It can be, but there are good reasons to never expect an advisor to be invested in the same types of instruments s/he recommends to clients.
Big picture investing
Recall a recent article I wrote in this space entitled Big Picture Investing. In it, I outlined a methodology for designing portfolios based on the makeup of an individual's net worth and income source(s). If you agree with the approach (which I use personally) then you'd have no choice but to agree that advisors should never "eat their own cooking".
Financial advisors' income and net worth are intimately connected to their business - i.e. client investments. Since their incomes will fluctuate with the fate of the stock market, it's not likely a good idea for them to hold much in stocks personally. Some advisors cater to specialized needs or focus on specialized products, like hedge funds, but most have a pretty standard mix of stocks and bonds.
Hence, an advisor who holds much of what s/he recommends to clients might not be doing such a hot job for him- or her- self. While investing in the very investments recommended to others has intuitive appeal, it's probably not the best way to go for the advisor.
Conflicts of interest
Financial advisors who recommend individual stocks and bonds would actually be in a conflict of interest position to sell stocks to their clients that they already hold themselves. Since there is a limited number of shares or units of stocks and bonds available, having a client buy shares of a stock already held by the advisor may have the appearance of trying to use client money to push up the price.
Regardless of the intent, most advisors don't want to deal with even the perception of such a conflict.
My take
Insurance advisors and salespeople don't have the same types of concerns as those advisors handling investment matters for clients. (Many, of course handle both.) Whether it's a life, disability or other type of insurance policy, it is good to know that the products being recommended are used for advisors' own needs.
However, as investing matters go, I'm a big proponent of the "big picture" or "net worth" approach. Hence, I would expect advisors to manage their investments in a way that makes the most sense for them - i.e. making sure their portfolios look nothing like their clients'.
Investors curious to know an advisor's commitment to their recommended strategies might get a better indication by asking how parents' or siblings' money is invested. That may provide better insight - and certainly should be more consistent with what is recommended for clients.