You’re No Angel
Rather than denying the existence of conflicts, a better approach would be to adhere to the fiduciary Best Practices formulated by the Institute for the Fiduciary Standard.
Originally published on Evidence Based Advisor Marketing
I have a very high regard for registered investment advisors. If investors understood your legal obligation to always act as a “fiduciary” in your dealings with them, they would insist that everyone providing investment advice would be held to this standard.
Unfortunately, they don’t.
But you’re no angel.
Some of you misrepresent yourself as conflict-free.”
You’re not.
You have conflicts of interest
Every RIA should read this excellent blog post by one of my favorite financial journalists, Jason Zweig. Zweig sets forth a litany of conflicts inherent in your relationship with your clients and why it’s both misleading and probably illegal for you to represent you are conflict-free.
Many of these conflicts arise from your bundled fee business model, in which you charge clients based on assets under management. This arrangement is still the predominant fee model used by RIAs.
There’s an obvious conflict when you’re asked for advice that could result in adding or subtracting from AUM. For example:
- Should the client pay off a mortgage?
- Should the client purchase a longevity annuity?
- Should the client purchase more life insurance?
- Should the client purchase a Certificate of Deposit or a money market fund?
It’s misleading to pretend these conflicts don’t exist.
A better approach
Rather than denying the existence of conflicts, a better approach would be to adhere to the Best Practices formulated by the Institute for the Fiduciary Standard.
Here’s how these practices deal with the issue of conflicts:
Your advisor seeks to avoid conflicts of interest. For unavoidable conflicts, your advisor 1) affirmatively discloses the conflict in writing with ‘sufficiently specific facts’ to allow client understanding, and 2) manages the conflict to preserve the client’s best interests. For material conflicts your advisor 3) obtains informed written client consent. Also, 4) your advisor affirms the transaction remains consistent with the client’s best interests. Further, he or she provides clients and prospective clients a written description of conflicts and steps to manage them.
Instead of denying conflicts exist, this approach is totally transparent and refreshingly candid.
The difference between dealing with a fiduciary like you, and someone held to a lesser standard (like most brokers) is significant. Resist the temptation to overstate your freedom from conflicts.
Resource of the week
You can read the Best Practices of the Institute for the Fiduciary Standard here.
