Originally posted: April 2, 2015
I have been managing investments for over twenty years and, during this period, I have met with many prospective clients. It is during these initial meetings that I review investment statements and other financial documents to determine if I can be of assistance. As an independent advisor, there is one specific situation that I believe deserves attention since it is a potential conflict-of-interest when acting in a fiduciary capacity. The situation looks like this:
Client has an investment statement from PFT Financial*, a wealth management firm. As I review this statement, I notice that the client has an investment named PFT Tactical Growth Fund*. The conclusion can quickly be drawn that PFT Financial manufactures its own products and is using their own proprietary funds for their client.
While this situation is not necessarily a concern, it warrants attention. First, let’s talk about why this could be a potential conflict of interest. After that, we can discuss how to determine if you should be concerned.
When you are working with a fee-based investment advisor, your annual fee is stated as a percentage of your investment balance (i.e. 1%). This is the fee your advisor receives for managing the account. It is generally referred to as an investment advisory fee. Within the account being managed by your advisor, you may have various investment vehicles which charge a separate fee, such as the fee a mutual fund charges to manage the fund. So if the firm employing the advisor is also using an investment it manufactured within the portfolio, they are double-dipping for fees. That is, they are receiving a fee for managing the account and another fee for the investment within the account. This is where a potential conflict-of-interest red flag should be lifted to the top of the flagpole.
Think about it this way, if you are paying your advisor 1% to manage the investment account, you expect your advisor will determine an appropriate allocation of investments based on your risk tolerance, goals and time frame. You will further expect your advisor to use a thorough due diligence process to select and monitor the investments chosen to invest into. But, what if they select their own proprietary investment, as in the example above, using PFT Tactical Growth Fund? Is this alone cause for concern? No. If PFT Tactical Growth Fund is the best investment vehicle based on the criteria (i.e. risk-adjusted returns) for the asset category, you are in good shape and your advisor is looking out for your best interests. On the other hand, if you determine through your research that PFT Tactical Growth Fund has had poor performance and high expenses, you should find out why your advisor has chosen that fund. If he or she does not have a good answer you may be able to conclude that they are using their own proprietary fund for the purposes of receiving the fees associated with that investment in addition to their investment advisory fee. To me, you would have to question the ethics of your advisor in this situation. Are they looking out for your best interest…or the firm’s?
For a complimentary, no-obligation review of your portfolio, feel free to contact our office at 410-740-0220 to schedule a mutually convenient date and time. In addition, mention this article and receive a free copy of my book, The Art of Retirement (with Foreword by Hall of Famer, Ronnie Lott) at our meeting.
* This is a hypothetical example and is for illustrative purposes only. No specific investments were used in thisexample. Any resemblance to actual people or situations is purely coincidental. This example does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted.