How to Spot an Advisor’s Conflicts of Interest

 

July 12, 2017

 

The Situation


JER WW PHOTODoes your financial advisor have a conflict of interest?


A recent article in the Wall Street Journal by Jason Zweig, Why Your Financial Adviser Can’t Be Conflict Free, argues that potential conflicts are inherent to financial advice. According to Zweig, investors should not be lulled into complacency when advisors claim to be conflict free. It’s better to understand and discuss potential conflicts than to think they don’t exist.


But is it really true that any financial advisor relationship has the potential for conflicts of interest?


What You Should Know


Yes, but compensation structure is the key to understanding the types of potential conflict. A financial advisor can be compensated in various ways, such as:


• Commission for products sold: This carries the obvious potential conflict of the advisor recommending products you don’t need, just to get a commission.


• Flat monthly or annual retainer for services: The potential conflict here is that the advisor is incentivized to do as little work for you as possible, since the retainer is the same regardless.


• A percentage of assets under management: The thing to watch out for here is an advisor who wants to capture all of your wealth under his or her direct management, in order to maximize his or her payout.


What You Should Do


As Adam Smith pointed out centuries ago, the strength of a free market economy is that it aligns the self-interests of business people with the interests of society as a whole. By offering better products, things consumers want, businesses can increase their profits. By helping consumers, businesses help themselves.


In the same way, you should look for an advisor relationship where your interests are as closely aligned as possible with the advisor’s interests.


Our business model is to be your family’s PERSONALCFO, a role in which we oversee the full spectrum of your wealth. And by being compensated based on your total wealth, our incentive is to grow that figure. We don’t try to capture money from your other advisors; we look for ways to coordinate your other advisors for maximum impact on your financial well being.


In other words, when you win, we win.


Is there any potential for conflict in this type of relationship?


Well, yes, if you want to be cynical. An advisor with this compensation structure could, in theory, discourage you from being charitable with your wealth, or encourage you to stay in a highly-paid job you hate. But such an advisor would be easy to spot. It’s a matter of your interpersonal relationship, your communications and meetings with him or her.


Are you and your advisor on friendly terms? Do you trust them? Are they interested in keeping up with your life and the changes in it? Do they encourage (and help) you to pursue your dreams, financial or otherwise? At the end of the day, are they more interested in your assets, or you?


Those are the questions you should be asking.


At PARTNERSINWEALTH we want to be a sounding board for all your financial questions and concerns. Please contact Jim Waters, CFP®, at 713.964.4028 or jrw@partnersinwealth.com.