Image Credit: Christophe Vorlet
By Jason Zweig | Apr. 7, 2017 1:46 pm ET
All financial advisers — like all people who perform a service for anyone else, including journalists — have conflicts of interest. That’s true regardless of whether they work for someone else or for themselves, whether they earn fees or commissions, or whether they call themselves “fiduciaries” who put clients’ interests ahead of their own.
Investors should bear that simple truth in mind as the U.S. Department of Labor announced this past week that it would delay a rule requiring anyone providing specific investment advice on retirement accounts to minimize conflicts of interest.
And you should be wary of financial advisers who aggressively market themselves with the label “conflict free.” No matter how sincerely they may believe it, that description is impossible.
This past week I found hundreds of financial advisers’ websites that claim to be free of ethical dilemmas. Such assertions include “with a fee-only adviser you can be assured of conflict-free advice,” and “when you work with us, you can feel confident that you are receiving objective and conflict-free advice.” Some even say they are “100% conflict free.”
Approximately 70 advisers affiliated with LPL Financial Holdings, the Boston-based independent brokerage and investment firm, feature this claim on their websites: “Because the firm has no proprietary products to sell, LPL Financial advisers can provide truly objective, conflict-free advice and investment recommendations.”
In an emailed statement, LPL said: “The language on these websites refers to the relationship between the adviser and LPL. By not offering proprietary products” such as house-brand mutual funds or annuities, “LPL allows its advisers to serve investors without conflicts resulting from incentives to recommend proprietary products.”
Added LPL: “Of course, in offering financial services, the potential for conflicts of interest often arises as the industry continues to evolve.”
LPL’s regulatory filings disclose several conflicts. For example, LPL affiliates may receive special payments for bringing clients with them from their former firms and may earn more when clients invest in one product or service than in another.
I read some of the “conflict-free” wording on advisers’ websites aloud to Brian Hamburger, president of MarketCounsel, a firm in Englewood, N.J., that helps advisers comply with investment regulations. “It pains me to hear you read these,” he said, “like nails on a chalkboard.”
“Conflict free” is good marketing. But it is a bad description of financial advice, because it can lull investors into dangerous complacency.
In almost 17 years of counseling thousands of investment advisers, says Mr. Hamburger, “I have never seen an adviser construct their business in such a way as to be free of all conflicts of interest.”
Some financial advisers charge higher fees to manage stock than bond portfolios: That’s a conflict. Advisers can earn more if you take a rollover from a 401(k) retirement account than if you leave the money where it is: That’s a conflict.
Advisers might also recommend that you borrow rather than use available cash to buy a property; a drawdown in cash could lower the base of assets upon which they earn fees. That’s a conflict, too.
Many advisers charge fees on money-market mutual funds but not on a certificate of deposit you hold at a bank. Not surprisingly, they often favor money funds over CDs even though CDs can offer higher yields, and that’s a conflict.
“For an adviser to say ‘we are conflict free’ is analogous to a corporate issuer saying that it is ‘risk free,’” says Arthur Laby, a professor at Rutgers Law School and former official at the Securities and Exchange Commission. “I don’t think regulators would stand for that.” Therefore, he says, they should also “look carefully at advisers claiming to be conflict free.”
Investors should, too. If your current or prospective financial adviser claims to be conflict free, download the firm’s ADV brochure, a required regulatory disclosure form available at adviserinfo.sec.gov or the firm’s own site.
Search the document for the word “conflict.” Chances are, the firm has told government regulators that its way of doing business raises several conflicts of interest.
Some financial advisers are forthright: Ethical dilemmas are inevitable. “No compensation structure can be conflict free,” declares the website of Sensible Financial Planning and Management, an advisory firm based in Waltham, Mass.
“We talk about that with clients,” says the firm’s founder, Rick Miller. “Being straightforward with people about what the conflicts are makes for a better relationship.”
Such an admission can be the start of a fruitful conversation about whose interests come first. That’s a much better basis for trust than any pretense of perfection.
Source: The Wall Street Journal, http://on.wsj.com/2o6o2eq
George Loewenstein, Cass R. Sunstein, and Russell Golman, “Disclosure: Psychology Changes Everything”
George Loewenstein’s other articles on the psychology of conflicts of interest
The Big Corruption in Small Gifts
Best Practices Initiative at The Institute for the Fiduciary Standard
Definitions of DISCLOSURE, FINANCIAL ADVISOR and POTENTIAL CONFLICT OF INTEREST in The Devil’s Financial Dictionary