Market Pulse: Investors who recognize conflicts of interest are better off
Conflicts of interest appear all too often when you follow advice from financial experts. Investors who can recognize a conflict will be better served.
I know an investor who is opening a managed account with a private bank. In an email, the private bank’s adviser wrote that the money would be invested in proprietary mutual funds issued by the bank. That’s a red flag. Instead of choosing to invest in the very best mutual funds or exchange-traded funds (ETFs), the adviser is recommending ones issued by his bank.
This arrangement allows the bank to earn multiple layers of fees. I looked up the funds and most had a 5 percent front-end load fee, a 1 percent exit fee, and an annual fee of 1.5 percent. Add to that the adviser’s fee along with others who might be managing sub-accounts. In the end, the investor is paying fees upon fees for vehicles that wouldn’t be chosen without the incentives.
Here is another example:
I recently read an article on smart-beta ETFs. The subject was interesting (OK, I’m an ETF geek), and it stated that ETFs that combine multiple factors in its selection process perform better. The author, who was a consultant at a well-known financial company, recommended multi-factor ETFs from his financial company. Like the first example, the author was simply plugging products from his own firm when better ones were available elsewhere.
It is not that these people don’t believe in the products from their firm. Maybe they do. It’s simply human nature to like what you know. On financial shows, there might be a guest who runs a small-cap fund, and when asked what area of the market he likes he’ll inevitably say small-cap stocks. Along the same lines, emerging market portfolio managers will always like emerging market stocks.
When evaluating investment advice, it’s always best to look for any possible conflicts of interest. Is a financial adviser giving independent advice or just plugging his own products? Is the financial expert on television telling you what he really thinks or is he influenced by a product from his firm? Ask yourself these questions before, not after, you act on advice.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.