Does conflict free financial advice exist?
A recent article in the Wall Street Journal is titled, “Why your financial advisor can’t be conflict free.”
I recommend you read it. It caught my eye because I strive to be as conflict free as possible:
- I charge by the hour ( $ 150)
- I have my own firm and report to no bank or insurance company
- I make no commissions from the sale or recommendation of any product
- I hold no client money
- I place no trades or orders for clients
- My hourly fee is the same for all clients
I suppose the closest thing to a conflict of interest for me would be an incentive to take a REALLY long time explaining my recommendations and advice. This conflict would exist with anyone engaging in an hourly model. A lawyer or counselor charging by the hour may have this conflict as well.
My reluctance to embrace a more industry standard “Assets Under Management” or AUM model is that it may incentivize the advisor to have the client keep as much wealth as possible in liquid assets as that contributes most to the advisor’s income. For example, an advisor may be tempted to have their client not pay off the mortgage, not invest in a private business, or not make a major gift to their favorite non-profit if that were to reduce the client’s liquid assets. If a 1% of liquid assets fee is the charge, reducing those assets can dramatically reduce the advisor's income.
I suspect I don’t need to explain why a commission based compensation model is bad. Most folks seem to understand the conflicts that are present when an ‘advisor’ is paid more to recommend one product over another.
A subscription type compensation model is a pretty good one. You simply pay an advisor a set amount each month for unlimited advice/access (like Netflix). If you are currently in an AUM advisor relationship, ask the advisor if you can pay him a similar amount, but as some sort of monthly subscription fee. The advisor may be just as eager as you are to do away with the AUM model, plus you get to keep the advisor if you already like him.
Sadly, the hourly model is not perfect. One shortcoming of the hourly model is that clients can sometimes ‘feel’ the clock and are tempted to rush through solutions. When clients are nervous about cost, it doesn’t work as well. While I want clients to feel the cost, I don’t want them to obsess over it. It’s kind of like sitting in counseling and only thinking “What is this costing me?” Not a recipe for success.
No compensation model is perfect or entirely conflict free, but I think the hourly model is the best one for my clients.