Conflicts

CNBC and the other financial television networks often feature portfolio managers or analysts who discuss the merits of investing in individual stocks.  Usually, at the end of the guest’s segment, there will be a graphic that shows whether or not the guest or the guest’s employer owns long or short positions in the stocks they discussed.  This is called Conflict Disclosure.  If, for instance, the guest makes bullish comments about a company but then it is disclosed that they already own stock in that company, then the guest’s comments should be taken with a grain of salt.  However, if they don’t own the stock, then perhaps the positive comments are not self-serving.

Financial Planning

In Financial Planning, the conflict may come when the planner might get a commission directly from selling a particular product.  Often this will come in the field of insurance.  Insurance brokers are almost always paid by commission, so a conflict is very hard to avoid if you purchase an insurance product.  Commission is not a bad word as long as you understand what the commission is and to what extent your advisor benefits from the commission.

AUM

Another potential financial planning conflict happens when your advisor is paid an Assets Under Management (AUM) fee.  Let’s say your advisor is paid 1% annually of your AUM, which is a typical fee amount.  In that case, your advisor is incentivized to keep money in the account rather than move it elsewhere.  What if the best thing for you may be to gift a large portion of your assets to a child or to a family trust which may not fall under the management of your advisor?  Your advisor has a conflict.  An advisor that collects an AUM fee can still call themselves Fee-Only, so it is not as easy as just going with a Fee-Only advisor.  As with a commission, an AUM fee is not bad as long as you understand it and know that your advisor will want to keep the AUM rather than suggest it get moved out from under their management.

IMO

Conflicts are not a bad thing as long as they are disclosed.  You just need to understand what you are getting yourself into and what the ramifications of the conflicts are to you.  If you are a suspicious sort and want to avoid all conflicts, go with a Fee-Only financial planner and negotiate the fee that you are paying them up front.  Like in any other endeavor, you tend to get what you pay for, so opting for the least expensive route may not be the best option for you even though it may mean no conflicts.  As for my firm, I don’t have an insurance license and I don’t get paid a commission for products that I recommend, so I am about as unconflicted as you can get, although maybe not the least expensive.  I will collect an AUM fee if you opt to enter into an actively-managed account situation with me but the fee would only be on the money in that account.

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