You’re a fee-only planner. Clients pay you directly, so you’re certain you don’t have conflicts of interest. But that depends on how you define conflict.
You attend a seminar about new F-class funds, and the manufacturer closes the presentation with a lavish cocktail party. Do you have a conflict?
You’ll get a bonus for pulling in 25% more assets than last year. Do you have a conflict?
You have a profit-sharing agreement with your firm. Do you have a conflict?
If these scenarios could colour how you work with clients, then you do. And everyone faces potential conflicts of interest, no matter how they get paid, says Ian Doug Macdonald, one of Canada’s first fee-only planners.
What matters most is how you deal with them.
Usually, people disclose or abstain from troublesome activities. Disclosure’s easier. A Carnegie Mellon study, The Dirt on Coming Clean, says, “Physicians will prefer disclosing gifts from pharmaceutical companies […] to actually eschewing such benefits.”
And relying on disclosure only works if the client knows what to do with the information. It doesn’t help to say, “I serve on a board alongside a portfolio manager,” if you don’t explain you might direct more money toward her fund.
The study adds most people look past these smaller conflicts of interest, because they don’t see themselves as corrupt. But that view leads to them overlooking their personal biases. The solution, then, is to avoid problematic situations or handle them with care.
For instance, some of your peers may not sell insurance because the compensation is embedded. But that inconveniences clients, who must go to other professionals to get a necessary product.
Here’s what Jason Pereira, an insurance-licensed, fee-based advisor, does. He makes recommendations, but doesn’t always place the business: if the client’s sister is an insurance broker, she can have the commission. And he’s refused non-monetary comp—including a trip to Hawaii—when his team’s earned top-producer status.
As for manufacturers’ sessions, Macdonald attends only if he covers the travel costs and if he sees educational value.
“You can’t be too strict,” he says. “Clients want you to know what’s going on.”
To protect clients beyond compliance-mandated disclosure, make sure a peer or branch manager also knows your bias. Ask for gut checks when making decisions where that bias might factor in. Or, recuse yourself.
And if you’re subject to policies that emphasize asset gathering over service and retention, you may want to change firms. One fee advisor notes a colleague switched because the former firm paid bonuses based on AUM.
On the flip side, tell clients when you do something that benefits them for which you don’t get compensated.
Admitting conflicts of interest doesn’t mean you lack integrity. Quite the opposite: Clients benefit when you address conflicts head-on.
Melissa Shin is the managing editor of Advisor Group.