Conflicts of Interest
Let’s make sure we are talking about the same issue. A conflict occurs whenever you and your financial advisor have different interests. For example, you need increasing assets to achieve your financial goals. You advisors needs your asset to produce personal income. These competing interests are a conflict of interest. And every conflict has the potential to damage you. Therefore, you should know how to recognize conflicts of interest and avoid them.
Following are descriptions of the most frequent conflicts of interest that damage investors.
Whose Interests Come First
25% of financial advisors are fiduciaries who are required to put your financial interests first. 75% of financial advisors are not required to put your financial interest first. Financial service companies and advisors make more money when they put their financial interests first.
Conflict: Investors are better off when their advisors are financial fiduciaries.
Sales Reps Versus Financial Advisors
Sales representatives masquerade as financial advisors to reduce the sales resistance of investors. If they told the truth about their real role, selling investment products, investors may not buy from them. This makes it difficult for them to make a living.
Conflict: Reps put their need for income ahead of investors’ need for competent, trustworthy advice.
In general, financial advisors make more money when they sell investment products that contain common stocks. That is because the product companies charge more money to manage equity products than they do to manage fixed income products. The companies pay bigger commissions to incentivize advisors to sell their equity products. The consequence is excessive risk for investors who cannot tolerate that level of risk exposure.
Conflict: Advisors make more money when they sell equity products.
Fees Versus Commissions
Sales rep licenses limit them to selling investment products for commissions. Their licensing does not allow them to provide financial advice or ongoing financial services. They replace financial advice with sales recommendations that is designed to look like financial advice. Investors think they are receiving financial advice when it is really sales recommendations.
Conflict: Investors are worse off when their “financial advisor” is compensated with commissions.
Companies make more money when they manufacture and sell their own financial products. They limit investor choices to their own products to maximize revenue and profit. Investors are better off when they have unlimited choices so they can select the best products.
Conflict: Investor choices are limited to proprietary products that produce the most revenue and profit for advisors and firms.
No advisor is going to volunteer information about potential conflicts of interest. It is up to you to ask the right questions and know good answers (benefit you) from bad ones (damage you).