Ask an Advisor: What Conflicts of Interest Can Arise Even With a Fiduciary?

The existence of fiduciary duty does not prevent potential conflicts of interest. Could you explain a little more about this idea? What types of conflicts could arise even with a fiduciary? – Marianne

Finding a fiduciary is a great start when you’re looking for a financial advisor. Fiduciaries are required to act in their clients’ best interests, which is obviously to your benefit. But you’re exactly right: a fiduciary financial advisor isn’t automatically free from conflicts of interest. Of course, that doesn’t mean that you can’t get good, objective advice. While conflicts of interest certainly can be problematic, they shouldn’t necessarily be a deal breaker.

The key is to understand the conflicts of interest that can arise and find an advisor who communicates honestly about those conflicts of interest during your initial conversations and as you work together. Here are a few things to look out for.

If you need help finding a fiduciary advisor, this tool can help connect you with advisors who serve your area.

Company Affiliation

Some financial advisors are affiliated with a specific brokerage firm or insurance company and are therefore incentivized to recommend that company’s products. These incentives may constitute a conflict of interest.

For example, if your financial advisor works for Northwestern Mutual, they may recommend Northwestern Mutual insurance policies. Or if your financial advisor works for Schwab, your investment portfolio may consist of Schwab mutual funds and ETFs.

You can end up with a great plan and the right tools for implementing that plan within this type of relationship, but there may be fewer options available than if you worked with an independent financial advisor. (And if you have additional questions about working with a fiduciary, this tool can help you match with potential advisors).

Sales Commissions

How a financial advisor gets paid plays a big role in determining their conflicts of interest. Some advisors receive much or all of their pay through sales commissions. That is, when you purchase the investments or insurance products they recommend, they receive a percentage of that purchase in the form of a commission.

There are different types of commissions financial advisors can earn. Some are paid upfront, while others are ongoing. Additionally, some are paid if and when you sell out of the product.

Commissions can be a conflict of interest for these two main reasons:

1. High-commission products are often not in your best interest, especially when lower-cost alternatives exist.
2. Certain financial products don’t pay commissions, which means some commission-based financial advisors may not recommend those products if they want to earn money.

(And if you have other questions about whether certain financial products belong in your portfolio, consider speaking with a financial advisor.)

Fee-Only Incentives

In contrast to commission- and fee-based advisors, fee-only financial advisors are only paid directly by their clients. This arrangement is specifically designed to minimize conflicts of interest by aligning your advisor’s financial interests with yours. It also removes any ties to any particular financial company or type of product. (And if you’re interested in finding a new advisor or just need a second opinion, this tool can help you find potential options).

However, even fee-only financial advisors have conflicts of interest that can arise:

• Advisors who charge a fee for assets under management have an incentive to recommend increasing your invested assets over other financial goals.
• Advisors who charge an hourly fee have an incentive to bill more hours.
• Advisors who charge a flat fee have an incentive to spend less time on your account in order to maximize their profit per hour.

Wondering if a financial advisor makes sense for you? Estimate the potential impact of working with a financial advisor using the calculator below.

How to Navigate Conflicts of Interest

At the end of the day, there is no financial advisor that I know of who’s free from conflicts of interest. There is always at least some incentive to make recommendations that could make them more money, even if it’s not completely in their clients’ best interest.

For you, then, the goal is to understand how your financial advisor is paid, what financial products they are able or incentivized to recommend and how that could affect the advice you receive. Then, you’ll want to have an honest conversation with your financial advisor about all of the above.

Financial advisors typically understand their conflicts of interest and are happy to talk openly about how they deal with them in order to serve you as well as possible. (And if you’re interested in starting that conversation, consider using this tool to match with financial advisors.)

Tips for Finding a Financial Advisor

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• It’s generally good practice to consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

Matt Becker, CFP®, is a former SmartAsset financial planning columnist who answered reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Matt was not a participant in SmartAsset AMP, and he has been compensated for this article.

Photo credit: ©Jen Barker Worley, ©iStockPhoto/AntonioGuillem, ©iStockPhoto/skynesher