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Financial Planning > Charitable Giving

All Conflicts of Interest Are Not Created Equal

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The new Department of Labor rule for IRA rollovers have sparked a resurgence of the debate over financial advisor compensation. But that debate itself goes back at least as far as when I started covering financial planners in 1984 and, from what I’ve read, quite a bit farther back than that. Just as this debate is nothing new, neither are many of the comment made in it. Still, some of those thoughts are so pervasive and recurrent that their pros and cons warrant exploring from time to time.

One such idea was thoughtfully expressed by Stephen Forman on April 27 on Producers Web:

“Even advice which comes from a disinterested third party is subjective. Advice from robo-advisors (whose algorithms are written by humans) prioritizes some information over other, or includes some information to the exclusion of other. Yet all the advice may converge on the same recommendation. A client may seek a dozen different opinions, and some paid, some unpaid, some commissions-based and other fee-based, and all agree on the same choice. So what does the conflict-of-interest matter? But those who’ve read my comments here over the years know that I take exception to the concept that the fee-compensated have a unique claim to the moral high ground, while commission-based individuals are corruptible Morlocks.”

First, let me speak for the advocates of fee-compensated fiduciary investment advice by saying that the majority of us do not think commission-based advisors are “corruptible Morlocks.” Well, not most of them, anyway. But we do tend to be students of human nature, who, after many years of often disappointing observation, have come to the conclusion that people tend do what they are financially compensated to do. In addition, the way that people are compensated is the clearest, most direct communication employers give employees about what they expect those employees to do.

So when Mr. Forman asks “What does the conflict of interest matter?” the answer is that it matters a great deal, particularly if it is a financial conflict. The fact that all advice is “subjective” on some basis is immaterial to this discussion, or a “red herring” in investment parlance. 

Sure, a broker who’s been trained as a fundamental stock analyst might be more inclined to use stocks rather than mutual funds in client portfolios. That’s a bias that may or may not be material to a specific client. And as Stephen points out: “No one knows what the future performance would be.” 

But I think most people would agree that individual, subjective biases that affect our judgments are very different than financial conflicts that increase or decrease someone’s compensation (either on a short-term or long-term basis, or both) depending upon what he/she recommends.

This is not a revelation or a ground-breaking concept: Most of us acknowledge this conflict throughout our daily lives. Only the most naïve believe that a car salesperson or shoe salesperson or clothing salesperson is giving them “objective advice” about what to buy. Or that if you pay your landscaper by the hour, he/she will finish as quickly as if you paid them by the job. Or that lawyers on retainer spend just as many hours on each client, as would be reflected in an hourly billing arrangement. 

So given our widespread understanding of human economic nature, why would we frontal-lobotomize ourselves when it comes to financial advisors? Sales create conflicts. Period. And there’s nothing wrong with that: as long as the clients understand that they are being sold, of course.

Professional financial advice, on the other hand, is, by law, intended to as financially conflict-free as possible.

That’s because financial conflicts of interest are in a class by themselves—and anyone who says otherwise likely has a financial conflict in doing so. And there’s nothing new about that. 


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