The Independent Financial Advisor: Conflicts of Interest

A truly independent financial advisor can be an indispensable asset to a family or a business. In fact, “independent financial advisor” is a phrase most frequently Googled by consumers in search of objective advice.

Most would assume an independent financial advisor to be one whose compensation comes via fees – either hourly, as a percentage of invested assets, or both – as opposed to one who earns his living via commissions. And while I suspect objectivity is more likely in the absence of a product sale, conflicts of interest abound nonetheless.

For example; your would-be independent financial advisor who charges client accounts based on market value typically establishes these accounts with a custodial institution – like Schwab or Fidelity. In which case the custodian makes its money on transaction fees charged either to the investor or the advisor and/or revenue sharing arrangements with many of the mutual fund complexes.

The independent financial advisor will typically pay all charges associated with the purchase or sale of securities. The first conflict arises from the simple fact that when an advisor effects a transaction he pays a fee, which dis-incentivizes the supposed independent financial advisor from creating activity within client accounts.

A less obvious, yet more egregious, conflict arises from the custodian’s practice of waiving transaction charges for revenue-sharing mutual funds, incentivizing the advisor to utilize only the “no transaction fee funds.”

Clearly, the independent financial advisor faces real conflicts of interest every bit as consequential (albeit less obvious) as those facing his commission-charging counterpart.

Bottom line; professionals who hold themselves out to be independent financial advisors while purposely limiting transactions and/or utilizing only no transaction fee funds are clearly compromising their clients in their efforts to maintain high margins.

The truly independent financial advisor will transact on behalf of his client as frequently as necessary without regard to transaction charges.  I.e., there’s no compromising his clients’ best interests…


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