One challenge with full-service brokerage firms is understanding potential conflicts of interest, which may not be immediately clear. When purchasing products like cars or furniture, you’re aware the salesperson may earn commissions. However, when seeking financial advice, you’re looking for guidance, not necessarily a product. If the adviser earns commissions on what they sell, their recommendations may be influenced by compensation. Fiduciaries, on the other hand, are obligated to act solely in your best interest, avoiding conflicts of interest and disclosing any potential conflicts by law.
If you need to buy a couch, you go to a furniture store to see which ones you like. The sales person’s job in the furniture store is to try to sell you the type of product that best suits your needs by explaining the differences in the makes and models you are looking at and telling you the prices. In this scenario, you also know that the sales person may be working on commissions, and so you know that the sales person may be biased and favor selling you something quickly, to move on to the next sale, or expensively, to generate higher commissions.
When you go to an investment professional, you are really looking for advice, not a product. You are going there because you don’t know what you should do, or what, you should buy, if anything. If you knew that you needed a certain mutual fund, you would have bought it. If you knew you wanted a specific life insurance product, you would have bought it. If you don’t know what you need, you go to someone for advice.
When you go to someone looking for advice, you should not pay that person commissions for selling you products that you didn’t know you needed when you went to him. His interests are clearly conflicted: it is too easy for him to recommend that you need the products that will be easiest for him to sell or that pay him the most commissions.
When you go to someone you see as a professional, and you are looking for advice, it seems ludicrous to think that the advice you are given is biased because the provider of the advice is trying to sell you a product for a commission. Does your lawyer or CPA try to sell you something for a commission when you go to them for advice?
You are much better off getting independent advice from someone who is not trying to sell you a product, and who does not have those conflicts of interest. Why should you settle on being wary of your adviser’s conflicted interests when you can avoid them altogether?
