In today's world, where image is everything, companies often spend a lot of time and money trying to cultivate an aura of trust and responsibility. Even businesses and people with somewhat questionable reputations do their best to focus on the good deeds they do. With the possible exception of lawyers, who perhaps realize that their reputations are tarnished beyond repair, everyone in business is out to look his or her best.
Financial advisors provide a good example. Since financial advisors incorporate all areas of your financial life into their guidance, you need to have the utmost trust in and respect for them. Good financial advisors are aware of that and do their best to generate an image that will put you at ease and help to build your confidence in them. However, you should always keep in mind that your advisor has a family to feed, bills to pay, rules to follow, and goals and dreams of his or her own. Given the potential for conflict, you need to understand the full nature of your relationship with your financial advisor.
The impossible dilemma
While an increasing number of financial advisors are independent consultants with control over the way they do business, many still work for large financial-services companies, many of which are public companies with a primary responsibility to maximize shareholder profits. As a result, financial advisors often find themselves in the difficult position of balancing their clients' needs against the demands of meeting sales goals and other employer-imposed requirements. Even smaller private businesses face similar challenges, in light of increasing competition and industry consolidation.
Most advisors have worked hard to obtain the knowledge that is helpful for their clients, and they deserve compensation for their services. However, the wide knowledge gap between advisors and their clients makes it possible for the advisors to be compensated in ways that a typical client may not notice. In fact, relatively few advisors include all of their compensation on a bill sent directly to their clients. Many clients never directly open their pocketbooks at all. Instead, commissions and other forms of compensation automatically flow from the investments an advisor recommends back to the advisor or the advisor's employer. When this happens, it's easy for advisors to point to their competition and argue that they're simply following industry practices. Yet some sets of ethical rules, including the Certified Financial Planner Board's Code of Ethics, require disclosure of all potential conflicts of interest and mandate that an advisor always acts in the client's interest.
Although you should be aware of the difficult line your financial advisor must walk, you shouldn't immediately conclude that your advisor is out to get you. Most advisors do a good job of balancing their responsibilities to employers and clients, and the commissions and other income advisors earn from managing a client's accounts typically represent reasonable compensation for the work they do.
However, you should also trust your judgment. For instance, if your advisor has always recommended conservative investments, you should definitely be concerned if he or she suddenly pushes you to put all of your money into a risky proprietary fund. You should candidly discuss these concerns and seek answers that will restore your confidence in the relationship. If your advisor cannot give you satisfactory answers, or if you continue to feel uncomfortable after you get an answer, it may be time to take more control over your financial management, or even find another advisor.
Finding good financial advice is tough. Investors with little or no knowledge about their finances are extremely vulnerable to disreputable professionals. And although few advisors engage in outright fraud, you still have to be on guard to understand how much you're paying for your advisor's guidance.
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Fool contributor Dan Caplinger is an attorney and therefore reserves the right to make self-deprecating lawyer jokes. He is also an independent financial planner. The Fool's disclosure policy always gives you good advice.