Q&A - Independent Agents

 

Topic:  Consumer Issues

Q:  My husband and I work with a "strip mall" financial planning company. We have been with this company for at least 5 years and feel like we are getting nowhere. We are looking for a planner that is not biased with one company over another because that is who is paying them the largest commission. Are there independent agents that will work for us? Should I be working with a planner associated with our bank?

A:  There are a number of independent financial advisors (i.e., not affiliated with a major financial institution or in any other way a "captive" agent) that will work with you.  We suggest you locate a Certified Financial Planner(tm) practitioner.  You can use either the same site where you posed your question, www.fpawi.org or the Financial Planning Association's web site http://www.fpanet.org/ as a great resource. Use the Public/Find a Planner section to find a practicing Certified Financial Planner(tm) professional in your area.  Interviewing 2-3 planners is a good idea. You might want to do a Google search on their name(s) by using "name" in your search. Putting the name in quotes ("name") will give you an exact search. This will give you information on the planners prior to your meeting. Doing a little homework prior to any meetings is a good idea.  You can also check to see if the planner has a disciplinary history at www.cfp-board.org and, while you're there, download a copy of their financial planner interview checklist from their "Learn About Financial Planning" page.

Re: Using a planner associated with our bank?

A major concern in using any advisor is the potential for conflicts of interest to arise in their business model. The potential for conflicts exist in almost every advisor business model.  Since it's virtually impossible to avoid them, it's absolutely essential that they be disclosed, discussed, and understood.  The reason they're important is that they influence the degree to which you will trust your advisor's recommendations.  If you think you will be hesitant to implement recommended strategies because you're not sure if they were made with your best interest in mind, then you should probably keep looking. Conflict of interest arises in two primary ways.

The first is "control and inducement". The company your advisor works for may require them or induce them to sell specific products or use a specific company's product.  This is the "captive agent" dilemma.  It also arises when brokerage firms receive payments from product companies for giving their products favored exposure and extra sales efforts.

The second major area of potential conflict arises from the advisor's method of compensation. The methods by which financial advisors is paid vary widely and include commissions, fees, salary, and combinations of these as well. 

An advisor paid by commission may be tempted to advise you to (1) purchase products when non-product solutions may work just as well or (2) buy certain products that pay a higher commission than other equally suitable products.  They may claim superior performance from the products they recommend, but you will have to determine if this is in your best interest.

Some advisors, including many that work for banks, may state that they are paid by salary, but their employers still receive commissions on the products they sell you.  You need to understand the degree to which their salary (or bonuses) may be determined by their sales volume and then decide whether or not knowing this will influence your trust in the advisor's recommendations.

Many advisors work for a fee paid by you.  While this method may have less potential for conflict of interest, it is not necessarily conflict-free.  For example, advisors who are paid a percent of assets under management have potential conflicts when advising you on issues like using part of your portfolio to pay down debts or to fund a lifetime gifting program. 

Again, the potential for conflict of interest exists in most financial advisory relationships to one degree or another.  The key to overcoming the challenges this poses lies in adequate disclosure.  If both you and the Advisor recognize the potential conflicts of interest that can arise, then you are well armed to put them in perspective when they do.

We wish you all the best as you work to set your financial advisory relationship back on the right course!