Does your financial advisor have a conflict of interest?
If your financial advisor has a conflict of interest, it can affect your money. Here’s what you should know and how to avoid it.
Summary
A conflict of interest typically means that your financial advisor is incentivized to make money from you, even at the expense of your financial interests.
You can tell if there’s a conflict of interest by asking how your financial advisor earns money.
Hire a financial advisor who is a fiduciary, who is required to put your interests above their own, and doesn’t earn commissions from financial products.
Unbiased can connect you with a qualified financial advisor who is a fiduciary, thus avoiding conflicts of interest.
What are conflicts of interest for financial advisors?
A conflict of interest is when a client’s best interests conflict with a firm or financial advisor’s best interests.
This usually occurs in the form of compensation for the advisor. There’s some degree of conflict in most business models for financial advisors, but some are more egregious.
If the advisor earns a bonus or commission from selling a certain financial product, that is a conflict of interest. If there’s incentive for the advisor to keep managing money vs. having the client pay down debt, that is also a conflict of interest.
Some other common conflicts of interest financial advisors may encounter include:
Commissions on products: A financial advisor who earns commissions on financial products is closer to a salesperson than a financial advisor. These recommendations may not be in your best interest.
Revenue sharing: When an investment company offers additional money to financial advisors for recommending their product.
Referral fees: Financial advisors could receive payments for directing clients to other professionals.
Proprietary products: When a financial advisor recommends products sold by the company they are employed by.
Fee-based advisor: For most recommendations, the financial advisor that collects a fee based on a percentage of the client’s assets under management (AUM) doesn’t have a conflict of interest. However, they do have an incentive to keep the client’s money in the portfolio, which directly translates into more money for them. This could create a conflict if you need to take out money to pay off debt, buy a house, roll over a 401(k), and more.
Social Security: Social Security payouts could create conflicts of interest for advisors who charge under the AUM model. Taking Social Security benefits earlier results in lower monthly payments for you, but would preserve the amount of money remaining in the portfolio managed by your financial advisor and earn them more money.
How can I tell if my financial advisor has a conflict of interest?
Many financial advisors have some degree of conflict, but the most obvious is in how and where they earn their money.
Here are some things to look for.
Your advisor works for a bank, brokerage, insurance company, or other financial institution: They’re a captive agent who cannot recommend the full spectrum of investments to you. They’re incentivized to recommend products from the business they work for that offer them a higher commission.
Your advisor is fee-based vs. fee-only: Your advisor advertises themselves as “fee-based,” which allows them to accept compensation from you as well as commissions. They’ll have a conflict of interest whenever they recommend a financial product to you that earns them commissions. If you’re looking for an advisor who only charges you for advice, look for the title “fee-only,” which implies they cannot earn money from commissions or assets.
Your advisor sells annuities: Annuities can have a place in your portfolio, but they also offer a high commission to your advisor. It’s prudent to look carefully at your advisor’s reasons for recommending an annuity to you.
Your advisor discloses a conflict of interest: Look in your paperwork for disclosures about conflicts of interest. Their firm may have relationships that create conflicts of interest. These may not always inherently be detrimental to your money, but it’s helpful to know about them and be vigilant about what products or services you’re investing in.
What is a fiduciary financial advisor, and is my advisor one?
Many financial advisors are not fiduciaries simply because they are employed by businesses whose products they are required to recommend.
A financial advisor at a bank is not a fiduciary.
An insurance representative is not a fiduciary.
A financial advisor who makes a commission from a financial product they sell is not a fiduciary.
A fiduciary financial advisor is a high standard to meet. Only financial advisors who are “fee-only” advisors and do not accept commissions can call themselves fiduciaries.
Meeting with a fiduciary financial advisor who has no incentive but to help you is a good way to go.
How can I avoid a financial advisor with a conflict of interest?
To avoid the pitfalls that come from an advisor who has a conflict of interest, you can take the following steps.
Ask how your advisor is paid: The method of payment for your advisor will reveal any potential conflicts of interest they may have. As mentioned previously, if an advisor is paid by commission, they’ll have a conflict of interest, and you may not feel secure in their recommendations.
Ask if they’re a fiduciary: A fiduciary is a higher standard for a financial advisor who must put your interests first. Not all brokerage advisors are fiduciaries.
Do a background check on your advisor: It’s possible to check FINRA’s BrokerCheck to see if they’re registered, what types of service they’re legally able to offer, or if there’s any disciplinary or regulatory action taken against the advisor.
Ask your advisor to provide a written disclosure of conflicts of interest: A good advisor wants to maintain your trust and comply with regulatory standards. They’ll be transparent about what conflicts of interest they have.
Ask your advisor to explain their investment strategy: See if their investment strategy aligns with your needs and risk tolerance. Take note of what investments they recommend and why.
Maintain control over all accounts: If you’re worried about conflicts of interest, you can maintain control over your accounts and follow through with the advisor’s recommendations yourself.
Educate yourself: The better informed you are, the better you can evaluate the advice you’re given. It’s rewarding to be a more active participant in your financial plan.
Get expert financial advice
If you’re worried about conflicts of interest with a financial advisor, open the lines of communication. Get the information you need about what conflicts of interest your financial advisor has.
Unbiased’s experts are fiduciaries who are required to put your interests first. You can feel secure in the advice you’re getting from a fiduciary advisor from Unbiased.
Content Writer
Alene Laney is an award-winning journalist for Unbiased, where she breaks down financial topics related to retirement, investing, and banking. She specializes in helping readers make the best decisions for their money with long-form content for brands and consumer publications.