You made the decision to buy the investment recommendations of John Smith a financial planner and advisor who is registered with Acme Financial. You thought John provided investment advice for fees because John neglected to tell you Acme is owned by a broker/dealer that in turn is owned by an insurance company.
Why is this important? The insurance company bought the broker/dealer to create more distribution for its own products. The broker/dealer may also require John to sell proprietary products in return for holding John’s securities licenses and providing support services.
This may sound innocent enough, but it’s not. What if the insurance company and broker/dealer produce inferior products and charge excessive expenses? There is no law against bad products or high expenses so you trust John to protect you from these risks. But John has a big problem. If he does what is best for you he gets in trouble with the companies that hold his licenses. If he does what is best for the companies he has to recommend bad products that undermine your financial future.
These core conflicts of interest vary by firm and ownership structure. Six primary types of companies sell investment and insurance products.
Broker/Dealers: Sell investment products
Insurance Companies: Sell insurance products
Registered Advisory Firms: Sell financial advice and services
Banks: Sell bank, investment, and insurance products
Money Management Firms: Sell money management services
CPA Firms: Sell tax, planning, and investment services
Big firms have big overheads so they have thousands of sales representatives who sell a variety of investment and insurance products. Most of these firms are also public companies that have Boards of Directors and shareholders. Their number one priority is short-term earnings that drive the price of their stocks. These firms have paid billions of dollars of fines for cheating investors to achieve these earnings.
Banks are also suspect sellers of investment products. Banks got into the investment and insurance businesses to generate more revenue streams from their customers. Like other big businesses they hired thousands of sales representatives to sell bank and investment products. They should have a warning sign because they spent years building consumer trust selling traditional bank products. Now, they take advantage of that trust by selling non-traditional bank products to increase their revenues and profits.
These are two examples of interests that compete with yours. One way to protect your interests is to ask advisors the following questions:
What is the name of your employer?
If you are an independent contractor what company holds your licenses and registrations?
Are you going to recommend any of these companies’ products to me?
Are you under any pressure to market these companies’ products to me?
Do you receive any extra compensation or benefits for marketing the companies’ products to me?
Do you in any way restrict my investment choices when you recommend investments for my assets?
Are you compensated with fees or commissions for your advice and services?
Unfortunately, you cannot assume you will always get honest answers. Make sure you require all responses in writing.
ABOUT PALADIN REGISTRY
Paladin began providing information services to investors who use the services of financial planners, financial advisors, and money managers in 2003. Services include advisor background checks, quality ratings, online documentation, and a free web-based match service that connects investors to local advisors who achieved the Registry’s highest quality rating (five stars). Visit www.PaladinRegistry.com for more information.
