The Times' reporter said to "Check the legitimacy of planners’ credentials, and ask them to sign a fiduciary oath, promising to act in your best interests at all times. And read every word of every account statement. If you see something, say something. You should never be confused by jargon, strange numbers or anything else on your statements."

Straight Talk on Compensation

Interesting piece in Sunday’s NYT on financial planners based on the news that James Putman and another employee of Wealth Management took $1.24 million each in kickbacks related to certain investments they were making for clients and fraudulently allocated $102 million in client funds.angel-devil dilemma

The Times’ reporter said to “Check the legitimacy of planners’ credentials, and ask them to sign a fiduciary oath, promising to act in your best interests at all times. And read every word of every account statement. If you see something, say something. You should never be confused by jargon, strange numbers or anything else on your statements.”

Who can disagree with that advice?  A lot of planners, brokers and advisers, from the sounds of things.  As I’ve written before, my first career was financial services.  I know earnest professionals and I know snakes in the grass.  If ever there was a time for proactive client communications, this is it.

Financial & Consulting Writing Prompts

Financial advisers aren’t the only professionals with compensation conflicts.  What about the IT firm that also sells the license to the software they’re installing…these prompts work for a variety of circumstances.

  • If you own your firm, tell your clients why you decided to structure your compensation as you did.   If you work for a broker or agency, tell your clients why you believe the comp structure you work under is fair to you and to them.
  • Explain how you balance the competing interests of your financial future and theirs.
  • Have an up-front discussion about how they can challenge your ethics.
  • Do you belong to a professional organization that requires credentialing?  Tell your clients about the credentialing process and how your preparation and credentialing benefit them.
  • Publish your continuing education plans for the year.
  • Solicit feedback from clients: what topics do they find most confusing?

About Tamela M. Rich

From Charlotte, NC, Tamela writes books, articles, speeches and presentations for business professionals. From "the road" she writes about the people, places and experiences she discovers and the life lessons she learns from them. Invite her to share some of her lessons from the road at your next event!

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3 comments

  1. Good points. Most of the major “wirehouses” such as Merrill Lynch, UBS, Morgan Stanley provide clients with a long, detailed legal document that explicitly states how they will be compensated. These agreements also clearly (if you’re a lawyer) state that conflicts may exist. As Tamela Rich ably states, in the financial advice business, there are good and not-so-good apples.

    One of the appeals to both advisors and clients is dealing with a so-called “fee-based” independent advisor that charges a fee based on assets and does not get “kickbacks” otherwise known as commissions for choosing certain investors over others.

    Obviously even institutional investors need help in this area, as the recent scandal over “pay to play” in the New York State pension funds shows.

    I agree wholeheartedly with Tamela Rich that the solution for both sides is to put clearly, IN WRITING, what the conflicts are and how the compensation is determined.

    Funny – no one asks their doctor how they get paid either? Might be worth asking. Most doctors I know have incentive to rush you through their office because they are paid by the HMOs based on how many patients they see per day.

  2. The day after this post Investment news wrote about a house bill, “Conflicted Investment Advice Prohibition Act of 2009” which l aims to allow only independent investment advisers — essentially those advisers whose compensation is not affected by the counsel they provide — to work directly with 401(k) participants.

    Hearty comments ensue — worth reading.

    http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090611/REG/906119981/-1/rss02&rssfeed=rss02

  3. Francis St.Onge, CFP, EA

    I am a fee-only planner and a tax preparer who sees many tax clients who have been “advised” on where to invest their funds (not me). I have been unable to rationalize in my mind how these tax clients were ever given an explanation on how some of their investments could have ever been for their benefit. On the other hand it was pretty easy to see how the adviser was benefited by the same recommendation. My most recent example was a person who was in an annuity that resulted from a rollover of his 401k. The withdrawal was taxable and resulted in a tax liability equal to 33% of the withdrawal because this caused their social security to also be taxed as well. Client had no idea about this until I did the tax return.

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