Managers Funds Fees Silent Partners2

Independence & Financial Advice: Another Case That Proves the Point

Managers Funds Fees Silent Partners2

There has been a consistent theme within the financial services industry for far too long: conflicts of interest. What motivates your personal wealth advisor to give the advice that they give? It is sometimes not as clear-cut as some of us think. Ideally, it would be doing what is right purely for the best interests of clients. But this is not the case.

Massachusetts Senator Elizabeth Warren recently issued a report titled Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry.  The report summarizes the sales practices of the 15 largest annuity providers in the country. According to her own words, the responses from the firms “reveal a widespread practice of offering agents kickbacks in exchange for promoting certain annuities.” Kick-backs included, and not limited to, “lavish cruises, luxury car leases, and other perks.” These of course are included on top of the commission that the agent earns for selling a particular annuity. Further, and even more disturbing, Senator Warren’s report also indicated that these kick-backs, “are effectively concealed from customers.”

This is not just chump change in the slightest. According to the report, an estimated $17 Billion (with a B) per year is put into the pockets of agents and pulled out of the pockets of investors. This money is used to incentivize the agent to sell a particular product. Once again, this is in addition to the tidy commission they make as well.

This isn’t the only example of conflicts of interest that exist within our industry, but is a pretty blatant example of what is effectively wrong with the industry as a whole. Whether it be deferred compensation plans with revenue sharing or recommending mutual funds based on sales loads, there is an underlying motive that is not in alignment with the people we are supposed to serve. Companies are putting a tremendous amount of pressure on professionals to sell product versus giving “advice.” We have spoken before about the role that insurance, specifically annuities, play in an investor’s overall financial plan here.

This is not to say that the financial services industry is full of professionals who are bad people and consciously trying to do what is not in the best of interest for their clients, but the financial services industry is setting these professionals up to be in a situation where morals are questioned or sacrificed. These people entered the industry because they wanted to be part of a very noble profession that helps people. But they have families to support and debt of their own. While we would prefer to believe that people who have the nerve to look their clients in the face and do something that is not in their best interest do not exist, it is just unrealistic. For most financial professionals, the pressure to sell product is tremendous. We would hope the best of these professionals would choose the product with the least amount of conflict of interest for an investor, but still, waste is created.

It is important to know that this type of arrangement between insurance companies and agents is not illegal. We do not expect investors to know all of the nuances of how financial products work or who get’s compensated or even be able to know the tenants of modern portfolio theory. But one thing is for certain: Working with an advisor who is independent mitigates a lot of the risks associated with the alignment of your financial well-being and conflicts of interest. Don’t expect lawmakers to do what is in your best interest. Work with professionals who are truly independent. At least you can evaluate their advice based solely on the facts of the argument they present; not any other underlying motive. It doesn’t matter if your advisor is your best friend, sibling, or the noblest person you have ever met. If they work in a system that forces them to be compensated for selling product versus giving a full commitment to giving advice based solely in their clients’ best interest, there may come a time where morals may be sacrificed in order to survive.

Index Fund Advisors has been committed to this mission since its founding. Transparency, fiduciary responsibility, and education all play to making sure our clients are always at the forefront of the decisions we make and the advice we give.