One of the many goals of the Department of Labor’s new Fiduciary Rule is to attempt to give investors access to conflict-free financial advice — a noble goal. After all, shouldn’t we expect to receive conflict-free advice all the time?
The truth of the matter is, conflict-free advice doesn’t exist. Let me explain. My firm, Oak Road Wealth Management, is a fee-only Registered Investment Advisory firm. That means I am bound by the fiduciary standard all the time. In other words, I am bound to always act in the best interests of my clients all the time, not just some of the time (that last part is important).
So, since that’s the case, does that mean my firm and I have no conflicts when it comes to dispensing financial advice? Actually, no. There are conflicts. For example, when I meet with a potential client, it benefits me for them to become a client. It also benefits me (up to a point) the more money a client brings to my firm. Does that mean the advice I give is bad or wrong? No, it just means there is a conflict you should be aware of as a client or potential client.
Note: Many financial advisors might be wary about disclosing the fact that there are conflicts when it comes to dispensing financial advice. If someone tells you they offer conflict-free advice, they may not understand what “conflict-free” really means.
Not all conflicts are equal
Even though there is no such thing as conflict-free advice, not all conflicts are created equal. For example, it is possible for a financial advisor to recommend products to a client where the financial advisor receives more compensation for one product over another. There are conflicts that exist where an advisor can recommend products that are created by their own firm. In such a case, the advisor could get paid by the client for their advice and receive additional compensation from their firm for selling one of their firms products. It is also possible for a financial advisor to benefit indirectly (not through direct compensation) for recommending one product over another.
Another example:
If an attorney recommends that you update your will, is there a conflict? Of course there is. That attorney benefits if you have them help you update your will. Does that mean that attorney is bad? Does that mean that attorney is wrong? Of course not. It just means you need to be aware that conflicts exist, they just do. Conflicts aren’t inherently bad, you just need to understand what the conflicts are. There are acceptable conflicts and unacceptable conflicts. You can’t discern between the two unless you understand what they are.
How your financial advisor gets paid
One of the most important elements of this discussion is to understand how your financial advisor gets paid. Firms like Oak Road Wealth Management only receive compensation directly from the client. That fee is expressed in dollars and cents as a line-item on the client statement. Neither myself nor my firm receives any non-transparent compensation from any source other than the expressed fee paid by the client. In many, many cases this is not the case. Many financial advisors get paid a transparent fee, as I have just explained, and in addition are paid from other non-transparent sources. The explanation for this non-transparent compensation is often buried in the stacks of paperwork that most clients never read.
How to know what conflicts exist
With the understanding that conflicts will always exist, my opinion is that you should at least understand what those conflicts are.
Here are some questions you should ask your financial advisor:
- Are you a fiduciary who acts in my best interest all the time? Don’t forget the last part. Some advisors are fiduciaries some of the time and not at other times.
- Do you get paid from any source other than the agreed upon transparent fee that appears in dollars and cents on my account statement?
- Do you recommend any product that was created by your firm or that your firm benefits from selling?
- Do you benefit in any way, shape or form by recommending one product vs. another?
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