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5 Ways to Limit Financial Planner Conflict of Interest

Last updated by on April 11, 2016

The motivation to find a financial planner seems to be pretty prevalent in the twenty-something crowd. I’m not quite sure why that is, and frankly, I’m a little bit concerned and irritated by it. It is something that I never considered doing, so I’m not quite sure what motives are behind the urgency, but my theory is that those who are now gainfully employed for the first time generally don’t have much financial background and feel like they better get an expert on their side quickly before they blow it all.

Granted, if you’re not willing to put the time and effort into learning a thing or two about personal finance, you may want to find a financial planner. I’ve learned that when it comes to personal finance, people often times do not budge when they get an idea in their head, even if it goes against common sense. Getting a financial planner because it is the ‘thing to do’, is one of those cases.. If you do go with an planner, I would recommend limiting any conflicts of interest that may exist.

How to Avoid Conflict of Interest with your Financial Planner or Advisor

financial planner conflict of interest1. Pay for your Financial Planner by the hour or flat fee

Planners get paid in one of four ways: hourly, flat fee, commission from products sold to you, or by % of your assets managed. You do not want to get into a situation where you are paying a percentage of your managed assets to a financial adviser. If they manage your assets, you are prisoner to their ‘long-term strategy’, and poor results.

Also, you should avoid working with a planner that lives off of the commissions that they make from getting you into certain investments. When paying by the hour or a flat fee for a set number of appointments, both you and the adviser knows that the only thing keeping you coming back from one appointment to the next is the outstanding value and education that they are providing you.

Starting in April of 2017, financial advisers must follow the fiduciary standard, requiring them to act in your best interests for retirement accounts. Ask them to put it in writing that they are in fact doing so.

2. You pick the investments – Test your CFP

In your first meeting with your planner, ask them what sectors they think you should be investing in at the moment. Then go and do your research and pick out the one or two best funds within that sector. Take your picks back to your planner and see what they say. If they try to steer you away from those investments into something else, the odds are that they are probably getting paid a higher commission from that particular fund company, and you’re going to get stuck with a dud.

Once you learn how to pick a mutual fund or invest passively you’ll find how easy it is to do on your own. At least you’ll get a better sense of a bad investment from a good one.

3. Hire a Financial Planner with No Previous Connections to you

Maybe the biggest fault people make when picking a planner is going with a family member, friend, or referral from a friend. This can create a situation where you feel guilted into following bad advice because you don’t want to hurt someone’s feelings or burn any bridges. This type of conflict of interest can lead to accepting poor advice passively.

4. Ask the right questions of your Potential CFP

Imagine starting a business and hiring a chief financial officer to run it. More than any other person in your company, your company’s profitability and your prosperity are largely dependent upon the skills that your CFP has. You would interview a number of people with some very tough questions and a background check for this position, would you not? So why should your standards be any less stringent when hiring someone to manage your personal finances? The Certified Financial Planner board has a list of 10 questions you should ask your financial planner interviewees. Also, check out my tips on how to choose a certified financial planner.

5. Be your own Financial Planner

If you have the time and motivation to learn a little here and there about personal finance, you can probably do without a financial adviser pretty easily. Educate your self on personal budgeting, investing in low cost mutual and index funds, saving for retirement in a 401K and Roth IRA, and paying off your debt, and you will be better off than most and can avoid all financial planner associated fees and conflicts of interest.

Don’t forget, always make sure your CFP is certified.

Have you ever worked with a financial planner? What have your experiences with conflict of interest been, if any?

About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Kevin says:

    I couldn’t agree more. There is very little disclosure about which funds pay advisor’s the highest fees. Many people I’ve talked to get steered into bloated fund categories that consistently underperform the indicies they claim as benchmarks. To my friends without a great deal of financial savvy, I tend to recommend an all ETF approach that gives exposure to many different asset classes at a target percentage for each– it’s the best way to save yourself the costs of a financial planner and the costs of actively managed funds.

  • stephanie says:

    I have 2 financial advisers/planners, and they are an absolutely wonderful asset to me.

    I am 23 and have very little background in finance. I’ve become incredibly interested in the topic, but I feel like my time is more valuable to me than the fees I pay. (That is, I don’t want to invest hours trying to pick out mutual funds right now – I’m a bit of a perfectionist, and will study and search until I know exactly what I’m doing and everything out there and the best thing for me. In the meantime, my money would be sitting in a checking or savings account earning 1 or 2% interest. Quick cost-benefit analysis says paying small fees beats earning no interest, at least in my case!) The adviser for my Roth IRA is through my bank, and she was a wonderful help to me about 18 months ago when I wanted to start saving and had no clue where to go or how to do that. My other adviser is for my 403(b) through work, and the vendors that work with us tend to be great because they know that if their fees are too high or their customer service less than satisfactory, they’ll be taken off the vendor list. (I’m associated with a fairly large university, so there are a lot of employees that they want to be able to reach here!)

    I completely agree that financial advisers are not necessary for everyone, and its quite likely that in 10 to 20 years I will be managing my own assets, but right now they have been an invaluable tool in helping me get started!

  • Jake says:

    You can tell if you have a good financial planner by one thing, HE is teaching YOU. He is helping you understand what it is you are doing. You should always know exactly what is going on with your money, and he should always have the answers.

  • etrade says:

    I totally agree. Even if I am new in stock trading, I would love to do all the hard work and not be burdened by another party which might expose me to the possibility of buying underperformed investments. There are so many trading sites that offers innovative tools and powerful search engine to jump start my investment portfolio. With them, I can also access to a trading network which can offer me unbiased market insights and analysis from the pros for free! That way I can totally educate myself and take control on my investments as well.
    I have nothing against financial planners but I am just not comfortable working with them especially that I have less knowledge on the market. When I made it big in the market and I am at par with Warren Buffet, then I will hire the world’s best financial planners. But for now, I am comfortable with going solo. It is my money and I have the right to be cautious and that includes on the people I work with.

  • Scott says:

    Everyone wants to believe that they have the highest ethics and always put their client’s interests first. The harsh reality is, it’s much more difficult to practice that belief, especially if one gets hit squarely in the wallet. A lot of planners that flaunt their ethics usually turn out to be offenders.

    Always try to understand how any planner makes money from advising you and what incentives they get from it. When you think about it, it’s not a lot different from a surgeon’s bias when they suggest surgery; or a lawyer’s bias in advising to sue. It’s not logical to think that an incentive doesn’t matter.

    Does a financial planner really put the client’s interests first? Sure, there are those who actually do. They promote their services as a financial planner and get their fee in actually doing a financial plan for you – that’s all they do. No selling of investment products or advising you to invest on a particular product.


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