— Financial Planning (@finplan) July 21, 2020
Recently, I was mentioned in an article from Financial-Planning.com about the conflicts the financial advisory industry faces.
The full article can be found here: A conflicted question: What is fiduciary advice?
I wanted to provide my perspective on it since it can be a complicated topic to understand. If you are working with a financial advisor (or plan to do so), it’s crucial to understand how they are compensated.
Let me preface myself – how someone is compensated does NOT necessarily mean they are more (or less) qualified to provide technically sound financial advice. However, I do believe it’s important to work with someone that charges fees in a transparent way.
As Charlie Munger once said, “show me the incentives and I will show you the outcome”.
If someone’s compensation is based on the sale of a financial product, what is the most likely outcome? They’re more likely to recommend that product. This may (or may not) be suitable for you ‘the client’ but is it REALLY in your best interest?
What even does, “in your best interest mean”? It means that the financial product, insurance product, investment, or overall recommendation is the best thing for you given your unique circumstances (not just because it pays the highest commission). The recommendation SHOULD factor in a variety of factors unique to you.
Great financial advice rarely meets a “one size fits all” strategy or product. This is where the concept of ‘fiduciary advice’ comes into play.
Fiduciary advice means the financial advisor (financial planner, etc.) is legally required to provide advice in your best interest. If they don’t provide advice in your best interest (and it can be proven), they can be held liable for adverse outcomes.
Here are some great resources for finding financial advisors that are required to provide fiduciary advice (and charge fees in a transparent manner):
You should always understand how much you’re paying your financial advisor and what you get in return.
Subtracting incentives from advice should be the prerequisite.