5 Warning Signs to Recognize Conflicts of Interest

In the United States, about half of all medical doctors accept some form of payment or gifts from pharmaceutical or medical device companies.[1] You are correct if you suspect these payments influence doctors’ recommendations to patients. The results of 36 individual studies showed the same outcome: “Industry cash influences how doctors treat their patients.” The same type of influence affects politics (through lobbying), magazines and newspapers (through sponsored content), and social media influencers (through paid sponsorships). It also, unfortunately, affects the financial industry.

When financial advisors are offered incentives—commissions, bonuses, paid vacations—in exchange for promoting a specific product, their lens becomes clouded. Even if they don’t intend to, they will likely be swayed by those incentives. That was also the case for me years ago when I worked for a commission-based brokerage company. Even though I tried to act in my clients’ best interests, there was always company-wide pressure to push certain investment products. And that creates an inherent conflict of interest.

How can you recognize potential conflicts of interest? 

For the average investor, the signs may not be obvious. Companies might expertly conceal fees or obfuscate their sponsors. What, then, is the everyday investor to do? I recommend taking the following five warning signs into consideration:

1. Unclear Sources of Revenue

How does a company make its money? What are the sources of compensation? With fee-only wealth management firms, income is generated through its clients’ fees — often charged by the hour or taken as a percentage of the client’s assets under management. The answer isn’t always so simple for other financial companies. Some companies generate income through commissions, by charging fees for buying or selling securities, or by earning interest on clients’ uninvested cash. 

The investing app Robinhood has gained popularity as a commission-free service with no minimums for investing. While that might be true, it must make its money somehow, right? After all, it is a publicly traded company and beholden to its investors who are counting on its continued growth. So, how does it do it? Mainly, it sells customers’ orders to high-frequency trading firms. This controversial practice relies on sophisticated computers and complex algorithms, which can edge out the average trader or cause extreme fluctuations in the market if an algorithm is triggered. The practice itself is not illegal, but removing humans from trading and relying solely on machines can cause plenty of trouble. For Robinhood, that trouble culminated in the Financial Industry Regulatory Authority (FINRA slapping it with a $57 million fine and order to pay $13 million in restitution because thousands of customers were approved for options trading when they weren’t eligible and other misleading communications and trading practices. This was a clear sign that Robinhood was not acting within the best interest of its customers. The lesson here is to be cautious with companies whose revenue sources are unclear.

What Exactly Is Wealth Management?

What exactly is wealth management? Many people are impressed by the term “wealth management.” It sounds important, official, and impressive. You might choose to work with someone whose business card reads “wealth manager” over someone who bills themselves as an “insurance salesperson.” After all, it seems like someone who manages wealth for a living must be trustworthy and dependable, right? 

Maybe…but maybe not. 

People who claim to be wealth managers might be honest and capable. On the other hand, they could be more concerned with making a profit than emphasizing dedicated client care. A person or company could provide various financial services—from estate planning to life insurance sales—and claim to be practicing wealth management. Why is that?

The term “wealth management services” can include many disparate services because it doesn’t have teeth. No one is regulating its usage or stipulating the requirements to become a wealth manager. There are no exams to pass, no oath to take, and no unifying guidelines. This lack of accountability can cause trouble for people seeking legitimate financial planning assistance.

Before we dive into the pitfalls of overusing the title “wealth manager,” let’s backtrack and discuss some basics, starting with defining this ubiquitous term.

Five Qualities of an Effective Financial Advisor

What if Warren Buffett called you today and offered to be your personal financial advisor? I bet very few people would turn him down. Buffett is the sweetheart of the financial world—someone who embodies a rare blend of intelligence and success mixed with humility and personability.

He’s a grandfather, a Midwesterner, and has owned the same modest family home for six decades…but he’s also worth over $100 billion, making him the sixth richest person in the world.

If Warren Buffett offers you advice, you might be inclined to take it. He has a proven track record and is not known for underhanded ploys or wild risk-taking. Some may consider him a little “old school,” but his methods have worked, and he wouldn’t intentionally lead another investor astray.

Many of Buffett’s qualities would make him a competent, trustworthy financial advisor—if he were to choose this profession. If we examine Buffet’s attributes, we find that they’re not terribly groundbreaking or unusual. Many financial advisors also embody these qualities, and it’s possible for consumers to recognize them. For this blog post, I’d like to discuss five important qualities to seek in a financial advisor and how to identify them.

First, however, let’s establish a few baseline characteristics.

The Essentials

My goal is to steer investors toward honest, disciplined, and fair financial advisors. With that in mind, I suggest consumers

• Seek fee-only financial advisors
• Avoid investment securities brokers, bankers, and insurance agents for financial planning
• Pay attention to professional designations/qualifications
• Do your research (using sites such as FINRA’s BrokerCheck, NAPFA’s Find An Advisor tool, and other resources I’ve listed in past blog posts) 
• Look for financial advisors who are committed to a fiduciary standard of care.

Three Steps to Avoid Media Bias

If you are looking for a financial advisor, where would you go? You may search the internet for the “top financial advisors near me” or “best financial planners in 2024.” When the search results pop up, you might breeze past specific firms in favor of a more “neutral” source—an article from a major news outlet, a column by a financial writer, a database of financial planners or a report from a financial publication. As you scroll through these articles, the same names or, at least, the same companies might keep popping up. You may think, “That’s a good sign; clearly, these are the top performers in the industry.” But are they the top performers or merely the top spenders? Are these the most competent and trustworthy financial advisory firms and advisors or simply the ones with the largest marketing budgets?

The Media Can Be Bought

At this point, few people will probably be surprised to learn that much of the news media—including financial media outlets—can be bought. Though the average consumer might, in theory, be aware of this, they may not realize the extent of the deception or know who to trust. It can be challenging to discern between factual articles and sponsored content. And it can be hard to see how a media company compiled lists of “top financial planners” or “best investment companies.”

In Barrons’ recent “Top 100 Financial Advisors,”[1] most advisors hailed from wirehouse brokerage firms. “Wirehouse brokerage” — a term coined before the advent of wireless communication — refers to large-scale, full-service brokerages employed by one of the big players (i.e. Morgan Stanley, Wells Fargo, Bank of America’s Merril Lynch, and UBS).[2]