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Part 2 of our blog series on the Investment Fiduciary.

The blue pill or the red pill…. that is the question.  You wouldn’t leave it up to your advisor to pick your pill.  Why leave it up to them to decide “what’s in your best  interest?”

 

How do they make their decision?  Follow the money trail….

The first part of this series, The Deal Breaker, focused on getting a basic understanding of what a fiduciary is and how to identify the 1% of financial advisors that are in a position to truly serve as a bonafide investment fiduciary. In part 2 we will dig into why using a fiduciary advisor is so important.

If you follow the investment media you might have read there is a heated debate regarding whether all financial advisors, brokers etc should be legally obligated to act in their client’s best interests versus those of the firms they represent. Here will we discuss common conflicts of interest and why it should be pretty clear which side of the fence you want to be on.

Conflicts: The incentives that motivate advisor behavior.

We find that sometimes the best way to highlight the insanity of the commission based compensation model is to relate it something that everyone has experience with, which is their own medical care. Imagine that your doctor is bombarded every day with drug companies willing to pay them a little extra to recommend their medication over their competitors.

Their drug reps call, visit, wine and dine, all with the intent of winning the doctor over. The effort that goes into that process is staggering and it is very similar to what happens in the investment world. In the end, the decision of which drug to provide you could come down to whichever company pays the most for the doctor to write their prescription.

 

Product reps are skilled at finding new ways to incentivize behavior. Not that simple, transaction-based commissions are not enough. In the same way you would never want a doctor recommending you a higher priced drug that does the same thing as the cheaper version, you would never want an investment advisor who can legally invest your money with the company who pays your advisor more by taking more from you behind the scenes.

The solution is easy.

Conflicts of interest run far deeper and wider, but this example gives you an idea of where the root of the issue begins. Many people are aware that these things happen, but those same investors assume that’s the way it is and always will be. Avoiding the firms that operate in that world is the only way to know with certainty that conflicts of interest are not driving advisor behavior in a way that adversely effects your bottom line.

Stay tuned… the next part of this series will lay out the heavy financial cost of assuming all advisors are the same.