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May 12, 2016 at 04:36 AM
It seems to me that in America today, we’ve hit an all-time high for notions that make little or no sense being spouted—and extensively repeated—as if they’re the Theory of Relativity, Part 2.
Because this isn’t a political blog, I won’t elaborate, except to say that you can easily spot these ideas, when their advocates are quick to attack anyone who disagrees, but neglect to offer a hint of a rational argument in support of their original idea.
Unfortunately, the financial services industry isn’t immune to this kind of “reasoning” either. (For example, a while back, I was compelled to take a hard look at the “flat” advisory fee movement when one of its leading proponents made the Orwellian statement: “AUM fees are commissions.”) And because the stakes are high in terms of client well-being, it’s important that we carefully scrutinize the thinking upon which financial “advice” is based—and delivered.
In my last blog (All Conflicts of Interest Are Not Created Equal) I explored some those ideas that serve to minimize the importance of eliminating (or minimizing) conflicts of interest in the delivery of financial advice. A reader named Kim O’Brien offered some pushback on my ideas about conflicts that are worth exploring further.
By way of background, this passage captures the essence of that blog: “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.”
I went on to point out that we are all well aware of the consequences of financial conflicts of interest in our daily lives, as illustrated by this paragraph which was quoted by Kim O’Brien: “Only the most naïve believe 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.”
O’Brien then made this observation: “So how is a financial advisor who receives an AUM fee for advising, rather than an hourly fee, different than a lawyer on retainer? A ‘corruptible’ fee-based [advisor] may have a financial conflict if they charge by the hour and STRETCH the amount of time necessary to complete the plan or if they are paid by the plan they shortchange the final output. Agree with the human element of conflict and the consumer is the best judge if the financial product or plan recommended was worth the cost. The DOL Rule favors one compensation model over [another] and in the end consumers lose, because they will pay more or have less access to advisors.”
First, it sounds to me as if O’Brien might be confused about lawyers on retainer. I used them as an example because most corporations, institutions and other wealthy clients overwhelmingly prefer to pay their attorneys on a fixed ongoing retainer precisely because this arrangement eliminates the obvious conflict of hourly billing.
