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Nancy Graham CPA, CA, CIM, CFP, TEP

Portfolio Manager
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Conflicting Incentives

July 31, 2014 - 0 comments

Welcome to our next installment in Nancy Graham’s “Minding Your Money Matters,” thoughtful financial advocacy vignettes that you can readily apply. In our last post, we discussed the personal challenges we face as rational investors trying to survive in the financial jungle. In this installment, we’ll explore some of the predators that lay in wait for us in the form of conflicting incentives.

Replacing Financial Vendors with Financial Advocates
As soon as we’re in charge of the financial industry, things are going to be different. We’ll start with an overhaul of how investors are served by their brokers – or, more accurately, how they are disserved when sales-driven conflicts of interest take away from what we believe should be a professional advisor’s true calling: advocating for investors’ best interests.

Hidden Incentives, Suspect Advice
When you shop for an automobile, TV or leather couch, you know that the salespeople you encounter work on commission and have a strong financial incentive to ensure you buy. They may even have financial incentive to have you buy a product on which they are paid more. You heed their “advice” accordingly.

Unfortunately, very similar incentive-based arrangements govern much of Canada’s financial industry. Throughout, you’ll find cozy relationships between product providers and their internal and external sales forces, as well as proprietary, in-house wares that strengthen the seller’s bottom lines, whether or not they benefit you, the buyer. For example, if your broker can earn more commission, better achieve sales quotas and more firmly lock you into remaining at his or her firm by giving the nod to “White Label Product ABC” over “Low-Cost Index Fund XYZ,” guess which one he or she is likely to find reasons to recommend to you?

Envisioning Financial Advocacy
When it’s cars, buyers are aware of conflicting incentives at work in the recommendations they get - there is a buyer-beware environment. The problem is, when it comes to investing, many investors are not aware that this is the case. So often, we see individuals who assume that there must be strong laws or other protections in place to safeguard their best financial interests.

Alas, there is much work to be done to advance meaningful, industry-wide incentives that better align the interests of financial product providers with those who are investing in their wares. In the meantime, it falls on advisor intermediaries to voluntarily take on the role of financial advocate, and to build our successful practices by sitting firmly and fairly on the same side of the table as the investors whom we serve. It also falls on you, as an investor, to seek out advisors who have demonstrably assumed this critical, industry-altering role. In our next post, we’ll cover some of the ways you can spot a financial advocate.

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