What conflicts do we have?

In a recent post at the Wall Street Journal, Jason Zweig points out that even though just about everyone who will work with your investments will now be required to be a fiduciary, conflicts of interest abound. A fiduciary is required to make all decisions in your best interest. Generally, this means avoiding conflicts of interest, but motivations are tricky things, and conflicts can be found just about anywhere.

At New Perspectives, we have been fiduciaries from the get-go. Nancy and I are both CFA charterholders and are proud of the fact that we hold ourselves to such a high standard. From what I have seen from clients that come to us, acting in a client's best interest not only makes sense, but can be very profitable for the client themselves. When past advisors have not acted in the client's best interest, their accounts have suffered.

So the best time to be skeptical and understand your adviser’s obligations is when you’re hiring the person in the first place, before that bond of trust has fused you together.

Ask whether the adviser gets compensated by anyone but you, and why. Request a written commitment to act as a fiduciary. Ask him to tell you about three conflicts of interest that might arise; if he tells you he doesn’t have any, put your hand on your wallet and leave immediately. Whether he’s called a fiduciary or not, that’s someone who’s either fooling himself or trying to fool you.

Reading that last paragraph really hit home to me. We preach a no-conflict relationship with our clients every time we see them. A fiduciary relationship is clearly spelled out in our contract. We don't just call ourselves fiduciaries, we are fiduciaries. To think that we might have substantial conflicts doesn't appear to align with what we say!

But I accept the challenge! I thought through our motivations to see what conflicts we may have.

To start, we are fee only advisors. Literally our only source of income is clients paying us for advice. For clients that just pay us for hourly advice, we strive to make sure we do not spend unnecessary time on a task or bill them for doing something not strictly relevant to the advice we are giving them. For clients who pay us an ongoing fee to manage accounts, our clear motivation is to keep managing their money and to manage more of it! Here is how some conflicts might arise.

• We are motivated to manage as much of your money as possible. If a client has a lot of cash or outside investments, we would want to manage that as well. To mitigate this, we typically recommend that people leave cash in a bank they are comfortable doing business with and give an honest assessment of whether or not we think their assets would be better managed under our umbrella. If the assets would be better left alone, we make it clear what the differences would be to the client. While a conflict may exist here, we are aware of it and still make decisions in the best interest of the client.
• While we do not have any performance-related fee on accounts, we are still motivated for them to grow. We know, however, that short term performance will likely increase long term risks in a client's portfolio. Our motivation is to prudently serve a client over time, not just for another quarter. Our portfolio decisions are still made with the client and current market conditions in mind.
• It is often thought that we prefer only large accounts and will therefore pay less attention to smaller accounts. While a conflict may exist where we prefer to service a larger account, the set up of our office and the technology available to us makes this concern practically nonexistent. We can trade in a small account just as easily as a large account, and the other financial advice needs of one average human are the same regardless of account size. While we do service accounts of all different sizes for people of all different needs, all clients get the best service we can offer.
• We may have a motivation to post higher numbers at the end of a quarter (when we bill) but that is not technically possible with us. Our assets are held at a third party, and any report we make can be verified with them. Additionally, our clients are invested in publicly traded securities with easily verifiable values. If we boosted those numbers, it would be worse than a conflict; it would be fraud. In that vein, we have a section of our website dedicated to the ways that clients are protected form possible conflicts, malfeasance or incompetence.

In light of all this, I am still comfortable telling clients that we will work in their best interest. We do see conflicts arise during decision making, but we will always act in our clients best interest. We truly believe that our long term best interest is only served by serving our clients best interest every day.