The existence of fiduciary duty does not prevent potential conflicts of interest. Could you explain a little more about this idea? What types of conflicts could arise even with a fiduciary?
– Marianne
Finding a fiduciary is a great start when you’re looking for a financial advisor. Fiduciaries are required to act in their clients’ best interest, which is obviously to your benefit.
But you’re exactly right – a fiduciary financial advisor isn’t automatically free from conflicts of interest. Of course, that doesn’t mean that you can’t get good, objective advice. While conflicts of interest certainly can be problematic, they shouldn’t necessarily be a deal breaker.
The key is to understand the conflicts of interest that can arise, to find an advisor who communicates honestly about those conflicts of interest — both in your initial conversations and as you work together — and to navigate them as thoughtfully as you can.
Here are a few things to look out for. (And if you need help finding a fiduciary advisor, this tool can help match you with potential advisors).
Company Affiliation
Some financial advisors are affiliated with a specific brokerage firm or insurance company and are therefore incentivized to recommend that company’s products. These incentives may constitute a conflict of interest.
For example, if your financial advisor works for Northwestern Mutual, they may recommend Northwestern Mutual insurance policies. Or if your financial advisor works for Schwab, your investment portfolio may consist of Schwab mutual funds and ETFs.
You can end up with a great plan and the right tools for implementing that plan within this type of relationship, but there may be fewer options available than if you worked with an independent financial advisor. (And if you have additional questions about working with a fiduciary, this tool can help you match with potential advisors).
Sales Commissions
How a financial advisor gets paid plays a big role in determining their conflicts of interest. Some advisors receive much or all of their pay through sales commissions. That is, when you purchase the investments or insurance products they recommend, they receive a percentage of that purchase in the form of a commission.
There are different types of commissions financial advisors can earn. Some are paid upfront, while others are ongoing. Additionally, some are paid if and when you sell out of the product. (And if you have other questions about whether certain financial products belong in your portfolio, consider speaking with a financial advisor).
