Remember the scene in the movie The Incredibles, where Mr. Incredible has been banned from his superhero activities and goes to work for an insurance company? He meets with an elderly woman and is torn between his desire to do what is best for her and his job requirement to do what is best for the insurance company. He ends up helping the woman and getting fired from his job. The scene is somewhat funny, but we also recognize a bit of truth in it. Conflicts of interest like this abound in the financial services industry.
One root of the problem goes back to the industry’s origins. At the outset, insurance companies and brokerage firms hired employees to sell their financial products to the public and incentivized them to do so. This arrangement set up an inherent conflict of interest where the success of the agent or broker is aligned with the company, but not necessarily with the customer.
Although conflicts of interest and financial incentives can lead to some pretty bad behavior (just think of the recent Wells Fargo scandal where employees opened millions of accounts without customer authorization), there are plenty of ethical brokers and insurance agents. But, the financial arrangement can still require them to decide between their employers’ interests and their clients’ (like Mr. Incredible).
There is another option, however. It’s possible to work as a Registered Investment Advisor (RIAs) who is paid solely by the client to give objective advice. This allows the advisors’ and customers’ interests to be aligned. In fact, RIAs are required by law to act as fiduciaries, meaning they must always put clients’ interests first. As a percentage of all investment professionals, RIAs make up only a small segment. But they are growing. Custodians such as TD Ameritrade and Charles Schwab, which hold assets for RIA clients, note that the greatest source of new business is from brokers leaving the old model to become fiduciary RIAs. Clearly these brokers are growing tired of the dilemma.
This change is good for consumers, many of whom think they are working with a fiduciary advisor when in fact they are not. However, it will take some time before the fiduciary advisor model becomes dominant. In the meantime, it’s important to research carefully whom you are working with and how they are paid to be sure you understand any conflicts of interest.
To avoid the dilemma altogether you can work with a fee-only fiduciary advisor. To find one in your area, go to www.NAPFA.org. To learn more, join us at our upcoming Wine Down Wednesday, The Truth About Financial Advisors.
If Mr. Incredible had been a fiduciary advisor he could have helped his client without harming his employer and kept his job. Isn’t that how it should be? Dilemma solved!