I read a great article this weekend that appeared in the Your Money section of The New York Times. The article was titled “The Perils of Finding a Conflict-Free Financial Adviser” and was written by Tara Siegel Bernard. It is pretty obvious, by the content of the article, that Bernard knows advisers and the tricks of the trade.
Her article starts by describing how difficult it is to identify advisers who are required to put investor interests ahead of their own. They are out there, but they are hard to find. These advisers are registered as Investment Advisor Representatives (IARs), which make them financial fiduciaries who are held to the highest ethical standards in the financial service industry. Perhaps one out of five advisers are IARs.
The other 80% are sales representatives (investment representatives, stock-brokers, bank representatives, insurance agents) who hold securities licenses that limit them to selling investment products for commissions. They are not IARs or financial fiduciaries so they are held to a much lower ethical standard called suitability. That is, they are “supposed” to recommend suitable investments based on their personal knowledge of investor situations, goals, and tolerances for risk.
As Bernard said, “My colleagues quoted former brokers at JPMorgan as saying they had been encouraged to push the bank’s own proprietary products when more competitive alternatives were available.” This is a major conflict of interest that is pervasive in the financial services industry. Companies and reps make more money when they do what is best for them versus their clients.
This is also an illustration of the greed and corruption that dominates Wall Street business practices. JPMorgan pressured advisors to sell company products because it made more money. The brokers may have sold the products because they made more money. Or, they got to keep their jobs. Either way, the investor is the big loser. This is probably not big news to most investors.
Is there any guarantee that an IAR who is an acknowledged fiduciary has no conflicts of interest? There is no guarantee, but there are two ways to increase your odds of getting conflict-free advice. First, only select advisers who are IARs and willing to practice full transparency with documentation for their qualifications, ethics, business practices, and services. Second, limit your selection to advisers whose only method of compensation is an asset-based, fixed, or hourly fee. Eliminating commissions goes a long way in improving the quality of advice you can expect from an adviser.
Lower quality reps and their companies hate transparency that exposes their weaknesses. They also resist documentation because you have a written record of their responses. You can turn this record over to an attorney, company compliance officer, or a regulatory agency. Also, if there is a future dispute you have written evidence, not just hearsay, of what was communicated to you.