A Case Study on Conflicts of InterestI have strong beliefs about conflicts of interest, because my family was hurt badly by one early on in my medical career. It’s what led to my disability insurance debacle that, to this day, prevents me from obtaining disability insurance. For those that don’t know my story, this is where my story about conflicts of interest begins: I was at the very end of my third year of medical school. My wife and I were new parents for the first time. I didn’t know much about money, advisors, conflicts of interest or what a true fiduciary might be. But I did know that I wanted to get term life insurance (at least I knew enough to avoid whole life insurance!). I approached someone who I thought I could trust. He was the brother of one of my medical school classmates, and he sold insurance. He agreed that the term life insurance was a good idea, but then he said that I should also get disability insurance. I didn’t undertand why I needed that with no income to protect. However, after a few conversations he encouraged me to apply for disability insurance. He asked if I had any medical problems. I told him that I had essential tremor and that I took medication to control it.
My Disability Insurance DebacleLet me stop here and say that there are things he should have known.
- There is a guaranteed issue disability policy that exists in training (no medical history or exam required).
- And that by applying with a known medical history there was a good chance I would be denied for disability insurance (then and in the future).
Your Goal with AdviceA little skepticism goes a long way when it comes to financial advice. Conflicts of interest can threaten your future. That is why I am passionate about the financial education of physicians. As mentioned earlier, you’ll need three things to get the advice that will help you build wealth:
- Good advice
- At the lowest price
- Without conflicts of interest
Questions to Determine ConflictsYou look at the fee model, and how much you’ll be expected to pay. That means look for areas where there might be conflicts of interest. There are some very direct questions that you can ask advisors. Namely, “How do you get paid?” You will notice that this is very different than the question that is more commonly asked, which is, “How am I going to pay for your advice?” If you ask the second question, a financial advisor who makes money from commissions might tell you that their financial advice is free since your purchased a product. What they aren’t telling you is that they made a commission from the product your purchased, and that’s how you are paying for the advice. I have a gold standard for financial advice that includes four things.
- A fee-only model.
- A flat-fee basis (no AUM fees – yes, this is a controversial topic).
- The advisor must be a true financial fiduciary.
- Experience working with physicians
Conflicts of InterestWhile I think all four of the characteristics mentioned above make the “gold standard” of financial advisory models, let’s not throw the baby out with the bath water. Of those four criteria, the most important is that your financial advisor is a fee-only advisor. What does fee-only mean? Less than 3% of advisors or financial planners are fee-only. These financial advisors do not sell commissioned based products. This means that they cannot place you into loaded mutual funds, or sell you commissioned insurance products like life and disability insurance. Instead, they can recommend the right product to you that fits your financial needs. They’ll like have someone that they recommend, but – again – you don’t have to worry about a conflict with the recommendation, because they cannot take “kick backs” from the person they recommend. Fee “based” models are very different. In a fee-based model, the advisor gets a portion (often most) of their income from commissions. Those commissions come from the products they sell to their clients and kick-backs. This poses a potential problem given that they can recommend the product that provides the best commission to them. If you get your advice from a fee-only financial planners, you can avoid a lot of conflicts of interest by getting your advice and products in different locations.
Take HomeThe take home here is pretty simple. You should know that you cannot blindly trust the financial industry. Get your financial advice from a fee-only planner, and buy your insurance products from independent insurance agents you can trust. That’s the best way to get advice and to limit conflicts of interest in the financial industry.
Have you experienced a conflict of interest that impacted your personal finance situation? What advice do you offer others to avoid these conflicts? Leave a comment below.