How Conflicts of Interest Shape Financial Advice: A Conversation with Mike Garry and Amy Patterson

Conflicts of interest in financial advice can greatly impact the recommendations that clients receive, especially from fee-only advisors. In this episode of Not Just Numbers, host Madison Demora and financial advisor Mike Garry are joined by realtor Amy Patterson. Together, they discuss how conflicts influence decisions around Social Security, mortgages, and real estate, while highlighting the importance of working with fee-only advisors.

The Shift Towards Fee-Only Advisors

The rise of fee-only advisors has changed how financial advice is delivered. As Mike Garry explains, 25 years ago, most advisors worked for large firms and earned commissions on the products they sold. Today, many advisors have moved to a fee-only model. This means they charge a flat fee or a percentage of assets under management, without selling products or receiving commissions. Conflicts of interest in financial advice can still arise, but the fee-only structure helps minimize them compared to other models.

This approach ensures that the advisor’s compensation comes solely from the client, not from selling financial products, making their advice more objective and aligned with the client’s best interests.

Fee-Only vs. Fee-Based Advisors: What’s the Difference?

The terms “fee-only” and “fee-based” are often confused, but there is a significant difference between the two:

• Fee-Only Advisors: These advisors charge a fee for their services, which can be a flat fee, hourly rate, or a percentage of assets under management. They do not earn commissions from selling financial products. Because their compensation comes only from the client, fee-only advisors are generally considered more transparent and objective, reducing potential conflicts of interest.
• Fee-Based Advisors: These advisors charge fees similar to fee-only advisors but can also earn commissions for selling products like insurance or mutual funds. This dual structure can create conflicts of interest because the advisor may recommend products that provide higher commissions, even if they are not in the best interest of the client.

Mike Garry operates as a fee-only advisor, ensuring that his clients receive financial advice without the influence of product sales or commissions, which sets him apart from fee-based advisors.

Social Security and Conflicts of Interest in Financial Advice

Social Security claiming behaviors can be influenced by conflicts of interest in financial advice. Research shows that individuals with commission-based advisors tend to claim Social Security earlier than those with fee-only advisors. Those without advisors often wait the longest to claim.

Mike’s firm advises clients to delay Social Security unless health concerns make it impractical. Waiting to claim can improve long-term financial stability as delaying benefits increases the monthly payout. However, some clients, especially those retiring at 60, find it difficult to wait almost a decade to collect their benefits. Fee-only advisors like Mike focus on helping clients make the best long-term decisions without the incentive to prioritize their own compensation.

The Mortgage Dilemma and Financial Conflicts

Another conflict arises when advisors recommend retaining a mortgage into retirement. Mike explains that some advisors may encourage clients to keep their mortgage rather than pay it off, particularly if paying off the mortgage would mean withdrawing funds from managed accounts. For a fee-based advisor, this could reduce the size of the portfolio and their compensation.

While it might seem beneficial to remain debt-free in retirement, paying off a mortgage with funds from an IRA or other investment account can lead to high tax liabilities. With historically low mortgage rates, it often makes more sense to keep the mortgage and allow investments to grow. Fee-only advisors provide more objective guidance on these decisions, as their compensation doesn’t rely on maintaining a larger portfolio.

Real Estate Conflicts of Interest with Amy Patterson

Amy Patterson, a seasoned RE/MAX realtor, joined the discussion to highlight how conflicts of interest also exist in real estate transactions. She emphasized the importance of trust between real estate agents and clients. While the primary focus of real estate agents is to help buyers and sellers achieve their goals, conflicts can arise when commissions influence recommendations.

Amy discussed how some realtors might push clients to buy more expensive properties because higher sale prices lead to higher commissions. She explained that, as in financial advising, transparency and clear communication are critical to ensure the client’s needs are prioritized.

Additionally, Amy pointed out a growing trend of buyers offering cash for homes to win competitive bidding wars. This strategy can often leave buyers unprepared, especially if they intend to secure financing after making an offer. She advises her clients to be cautious and make decisions based on long-term financial stability, rather than immediate wins.

The Importance of Working with a Fiduciary

Throughout the discussion, both Mike and Amy stressed the importance of working with fiduciaries. A fiduciary is a financial advisor or real estate agent legally obligated to prioritize the client’s best interest. Mike emphasized that while fee-only advisors reduce conflicts, they don’t eliminate them entirely. Asking your advisor or realtor to act as a fiduciary ensures that their recommendations are based on what’s best for you, not just for them.

Final Thoughts: Navigating Financial Conflicts

Fee-only advisors and real estate agents provide valuable services, but conflicts of interest in financial advice and real estate are still common. Whether you are working with a financial advisor on retirement strategies or a realtor on purchasing a home, it’s essential to be aware of potential conflicts and ask the right questions.

To protect yourself, work with fiduciaries who are legally bound to put your interests first. Be proactive in understanding the long-term impact of their recommendations and always make informed decisions based on your unique financial situation.

Key Takeaways:

• Fee-only advisors charge based on a set fee, reducing conflicts of interest related to product sales.
• Be cautious of advice that encourages early Social Security claiming or retaining a mortgage in retirement.
• In real estate, agents may have incentives to push more expensive properties. Transparency is key.
• Always work with fiduciaries to ensure your advisor or realtor is legally required to prioritize your financial well-being.

Table of Contents

• The Shift Towards Fee-Only Advisors
• Fee-Only vs. Fee-Based Advisors: What’s the Difference?
• Social Security and Conflicts of Interest in Financial Advice
• The Mortgage Dilemma and Financial Conflicts
• Real Estate Conflicts of Interest with Amy Patterson
• The Importance of Working with a Fiduciary
• Final Thoughts: Navigating Financial Conflicts