The Inherent Conflicts of Financial Advisors - Buyer Beware

Only a true financial planner or financial planning team can help the general public.

You may not agree with the above statement but unfortunately when push comes to shove it is very true. There are three ways in which a person/entity gets remunerated for their work – salary, fee and/or commission. If you work in the financial world, you will have a bias toward what is right or wrong for a client depending on how you get paid.

If you are salaried, you likely represent only one entity and you are apt to be bonused based on the number and/or types of products you get your clients to purchase. Moreover, how can you possible do the right thing if you are only able to put your clients into one company’s programs? It is simply not possible in all instances as no one provider is the best 100% of the time.

If you are paid through fees, then you need to justify your fees and your recommendations will reflect this need for justification. A fee based person will put together a wonderfully verbose and often over the top plan when a one page set of recommendations would likely suffice. A fee based person will continue to make the simple complex in order to create a dependency so that the client must return for more assistance (not advice) again and again. Not only that, many fee based people share in the income generation through the referrals to a product implementer who often gets paid a commission.

Speaking of commission, there is no possible way that a commissioned individual can practice without conflict – even if the commission is generated equally from all products implemented, which is definitely not the case.

So what is the consumer to do? The simple answer is they should hope that the person they deal with has their best interests at heart the majority of the time.

A second aspect that undoubtedly causes conflicts is the product(s) that an advisor works with. For the most part, an advisor focuses on a maximum of two areas and does not work with other advisors to ensure that the other areas are addressed as well. For example, a bank advisor may work in the area of cash flow (asset accounts and debit accounts) but likely has no understanding of the realm of taxation or estate planning and almost certainly does not refer to those areas. In addition, the risk management area is often addressed through creditor insurance only and not referred to the appropriate professional in that area.

The same can be said for someone who focuses on investments. The goal of that type of advisor is often to gather as much assets and ongoing investment as possible so the conflict is that the advisor wants all of the funds to the investment side and not to any other side unless it adds to the investments. An insurance advisor is not apt to be any different in that they are looking for as much money as possible to fund the insurance plans they propose.

Now that the whole financial world has been painted as a bleak bunch of conflicted people, here are a few things to guard against the above issues:
1. Get referred into an advisor by someone who you know well and trust, like a family member
2. If you are not referred in, then ask the advisor for referrals
3. Make sure that the advisor is designated. This does not mean that s/he is brilliant, but it does mean that they have spent some time doing continuing education which is only going to help you.
4. Make sure that the advisor is a member of a professional association and one that holds themselves out as having a code of ethics.
5. Make sure that the advisor provides you with a Letter of Engagement outlining the services they offer, how they are compensated, who they are licensed with and the companies that they deal with. This is imperative as it is law in the province of Ontario.
6. Go with your gut – if you do not mesh with a potential advisor, do not employ them
7. Don’t be afraid to interview a few different people to find one or more that you can work with

So cynicism aside, there are some advisors in this world who do address all of the areas of financial planning or have a team that accomplishes that. The key is to find them and then hang on to them.