When dealing with professionals in any industry the question as old as time should be considered: Does this individual have YOUR best interest in mind? This brings me back to a cartoon I saw when I was a kid that depicted a doctor writing a prescription to his patient and saying: “Try this pill…I just bought 1000 shares”.
When seeking financial advice it’s important to understand the potential conflicts of interest that may exist. A potential conflict of interest is not necessarily a bad thing. However, each potential conflict of interest should be disclosed so you can make an informed decision. Conflicts can incentivize someone to move you towards a certain decision and if those potential conflicts are not disclosed it can be difficult to determine whether the advice being given is in your best interest. It is best practice to do your due diligence to ensure each scenario has been communicated and vetted, for better or worse. With personal finances, it is essential that you understand the potential conflicts of interest and how they can impact financial planning decisions.
Understanding conflicts of interest that exist
The most obvious example of a conflict of interest is when an advisor receives a commission or fee based on their recommendations. If they stand to gain financially from an investment, product, or service, they may be more likely to steer you towards that product even if it’s not necessarily in your best interests. To be fully aware of this type of conflict, ensure that your advisor provides the following:
- Engagement & Disclosure Document: This defines the expectations of the relationship between both parties.
- Advisor Compensation: How they are compensated for their services or products and if they are incentivised to make that recommendation. Understanding that advisors need to get paid for their work – identifying how they get paid is important.
- Advisor Fiduciary: At ALL times when providing financial advice to a client, a CFP®, Certified Financial Planner, must act as a fiduciary, and therefore act in the best interests of YOU, the client. Furthermore, CFPs and QAFPs™, Qualified Associate Financial Planners™ must also adhere to duties of loyalty, integrity, objectivity, competence, fairness, confidentiality, diligence, and professionalism when dealing within the advisor/client relationship.
Overall, it’s important to understand potential conflicts of interest before entering a relationship with a financial advisor. Ask questions and do your research to ensure that any advice you receive is in your best interests and is free from bias. Conflicts of interest aren’t necessarily a bad thing. Understanding the conflicts of interest that exist can go a long way in helping you make informed financial decisions.
