|Avoiding Conflicts of Interest|
|A financial planner's job is to ensure
that your investments are the best choices, in light of
your personal objectives for growth, income and risk. In
order to perform this important service, your planner
should have only one person's interests in mind -- yours.
Unfortunately, many financial planners work under arrangements that prevent them from serving your interests exclusively. These planners have divided loyalties -- or a conflict of interest -- which may interfere with providing you with the best, most objective financial advice.
A conflict of interest does not mean that the planner does not have good intentions, or that he or she is not honest. It just means that the person is not free to serve your interests exclusively, which could result in inappropriate purchases or investments if you rely upon his or her financial advice.
ElderNet believes that there are at least three kinds of financial planners who have a conflict of interest problem.
Planners Who Work for an Investment Company
First, you will find financial planners who are employed by a particular investment management company. These individuals have financial incentives to sell that companys products. When giving you financial advice, ElderNet believes that the financial incentives to sell their employer's products can work against your interests.
A financial planner should exercise independent judgment for your benefit alone. ElderNet's view is that planners who work for the company whose products they sell cannot be sufficiently independent to provide the objective advice you need.
Second, stockbrokers sometimes call themselves financial planners. ElderNet believes that these persons also have a conflict of interest.
Brokers have a financial interest in buying and selling your investments from time to time, whether or not a new transaction is really necessary. If your planner is paid by commissions from sales of your investments, he or she may be influenced to trade products that should be left alone. This could cost you money and negatively impact the quality of your investments.
Finally, banks often offer financial planning services. Most banks, however, offer only their own or affiliated investment products. Like the two situations described above, a bank has a conflict of interest if it tries to serve as a financial advisor for you while trying to get you to buy its particular products.
Look for an Independent Planner
The key to good results from a financial planner is to make sure you hire an independent professional whose first and only concern is the best possible financial plan for you. Avoid planners who are identified with the products they sell, or who are paid only as brokers.
Even independent brokers, however, can have conflicts of interest with respect to certain high-commission products, such as insurance and annuity policies. Unscrupulous agents may recommend insurance products without providing any meaningful review of your investment needs, options or goals. The isolated purchase of insurance or annuities usually does not make you any more secure than you were before, and in the meantime the agent earns a quick commission -- which may be all that he or she was really concerned about in the first place.
Rules of Thumb
ElderNet suggests the following rules of thumb for avoiding conflicts of interest when selecting a financial planner:
1. Hire only an independent professional who charges by the hour. You may find that hourly rates can be satisfied, wholly or in part, by commissions from certain investments. But if the planner cannot work by the hour, look for someone else.
2. Avoid any financial planner who is an exclusive agent of any investment company (i.e., the company whose products he or she offers to sell to you), regardless of how reputable that company may be.
3. Never hire a full-time stock broker as your financial planner.
4. Do not accept financial planning services from banks.
5. If a financial planner recommends investment in insurance or annuity products, get a second opinion before you buy. Ask for a written explanation of why the planner recommends this purchase, and how it fits into a complete financial plan. Show this letter when you go for a second opinion.
There is much more to
consider when obtaining the services of a financial
planner. The links you will find on Choosing a Financial Planner offer additional tips and advice
that may prove useful to you.
© 1997-99 by ElderNet, Inc. All rights reserved.