January 13, 2005
There is a clear conflict of interest when a Broker/Dealer, or Insurance Agent also calls themselves a Financial Advisor.
I could support firms that offer full services to also provide financial advisory or planning services, but only if the company provides full, accurate, and initial disclosure to prospective customers that these individuals may offer products or services from the same company, and how they are compensated for these products/services.
I have had considerable experience with dealing with disgruntled clients, and with companies that sell financial advisory services, when in reality, what they are selling is the underlying products of the companies they work for.
I have a fiduciary responsibility to my clients requiring me to represent them in their best interest. I can not see how a person who calls themself a financial advisor can not have a conflict of interest, when their employer is providing them with incentives to sell the company products.
Unless the SEC creates new rules that ban Advisors from being both an advisor and a broker/dealer representative, or insurance sales agent, there is going to be conflict, and ultimately, trouble.
At a minimum these individuals should be under the same scrutiny as registered investment advisors. At best, the company should partition advisory services away from the selling of products along with full disclosure in advance. Advisors under these circumstances should be free to offer a client any product, without retribution from the parent employer.
Case in point: I recently took over portfolio management for an elderly couple in their 80s who had an advisor that had 100 of their investments in aggressive equity mutual funds, all of which had front end loads. He was being compensated as a percentage of assets.
It was obvious to me this advisor was not looking out for his client in fact he was in violation of the Advisors Act, but more interested in collecting his quarterly fees from the client, while at the same time getting a piece of the 5 load as commission from the mutual fund company.
This client initially transferred all their original assets which were in the form of CDs and bank savings deposits to the advisor who in turn busted up the CDs creating early withdrawal penalties, and proceeded to invest in aggressive growth mutual funds prior to the NASDAQ crash of April 2000. By January of 2003 they had lost more than 70 of their life savings.
Fortunately this is more the exception than the rule. However, try telling that to my client? I believe the SEC shold seriously scrutinize this behavior and consider it a conflict of interest. Receiving income as a percentage of client assets is not the issue. Its receiving commissions and other incentives for underlying products sold to the client, and on top of it a percent of assets. If a company requires its agents to sell the company product over other products, they should not be able to hang their shingle out as a Financial Advisor. It woulf defy the fiduciary pricipals and be a clear conflict of interest.
This piece for sure, should be banned.
William D. Luisi BA, MBA, EA
Registered Investment Advisor