When I got into this industry over 16 years ago, I’ll be honest and admit I really didn’t have a clue what I was doing. I started the Monday after I graduated from college and was thrown into the “bullpen” and told to start studying for my exams that I was to take over the next 4 months—I won’t bore you with the details.
Once I passed those, I then went through some really terrible sales training. When I returned back to the office, I was basically told to start bringing in new clients and good luck. Seriously, that was it.
I was also told that if I sold certain investment products over others that I would get a higher commission. Since I was a broke 21-year-old, I was happy to get paid more for recommending one product or mutual fund over another if I would make more money on it. I did have to eat and survive.
Well, fast forward 16 years later and, believe it or not, not much has changed in the industry for many financial advisors. While I have been practicing as a fiduciary for over 10 years – where my client’s best interest must come first and foremost –, the majority of firms out there today still exist with these types of conflicts of interest happening behind the scenes, and their clients have no idea.
Clients believe they’re getting recommendations that are in their best interest, but many times, they’re simply just good enough – or what’s called a suitability standard. Things have certainly become more transparent over the years, but let’s be honest, who actually takes the time to read the fine print to know about the myriad of conflicts of interests that are happening behind the scenes?
Before I get too far down this rabbit hole, let’s take a step back so you have a little background on what exactly a conflict of interest is and why they exist in the first place.
According to Dictionary.com, a conflict of interest is “a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity.” In other words, there’s something not quite on the up and up happening behind the scenes that isn’t exactly revealed to the client.
In a financial advisor/client situation, it could mean recommending one mutual fund over another because they get paid more or there’s more of an incentive to do so—even if the one they don’t recommend is actually a better fund and a better fit for the client. While this does seem quite deceptive—and it is—it happens all the time in the financial services industry.
Because we have choices when it comes to which mutual fund to invest in, some mutual funds will incentivize the salesperson (AKA, financial advisor) to recommend their fund over another. I can certainly see where the mutual fund company is coming from as they want more money in their fund, which means more revenue for them.
I can also see where the financial advisor is coming from as well, especially if they are just starting out and are needing to pay their bills. However, what happens is that the client is the one left holding the bag as they are the ones having to take the brunt of it, which obviously completely misses the mark of why we’re in this business in the first place.
It’s simply a fundamental flaw in our industry that should have been addressed a long time ago. Financial planners should get paid the same regardless of whether they recommend Fund A or Fund B as long as, most importantly, it’s in the client’s best interest.
The easiest way to avoid them is to simply ask “are there any conflicts of interests I should be aware of?” If that’s too uncomfortable to ask, then the easier way is to simply make sure you are working with a fiduciary, which means a Certified Financial Planner® and/or Registered Investment Advisor.
A Registered Investment Advisor is a firm who practices a standard that must put their client’s interests above all others, i.e. a fiduciary. The same can be said of a Certified Financial Planner®, it’s just that a CFP® is an individual while a RIA is a firm—and just to make it more confusing, a CFP® can work in an RIA. That would be me, a CFP®, working at NextGen Wealth, an RIA.
While I could really dig into the weeds here, I will digress. So, let me lay it out for you very simply. Here are the three ways to ensure there isn’t a conflict of interest happening behind the scenes with your financial planner:
That’s it, plain and simple.
The good news is that things are a changing. They’re still not exactly perfect yet, but all firms are being forced to practice the fiduciary standard. Effective June 9, 2017, the Department of Labor is putting a new rule in effect that is being phased in over the next six months that will require all financial professionals to practice the fiduciary standard when dealing with retirement plans and retirement planning advice.
Notice I only said retirement plans and retirement planning advice, but hey, at least it’s a start. It’s not exactly perfect, but we’re moving in the right direction. There is a lot of money behind the scenes that doesn’t want this rule to happen, so stay tuned for the next six months. If you want to read more, check this out at Investopedia.
In the meantime, follow my three rules just to be safe. That’s truly the only sure way to know your financial advisor is working for your best interest.
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NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
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