Bad Incentives.
“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”
– phaedrus
By Shawn Perkins | Financial Planning
4 minute read
I love my job. I love meeting people and getting to know them. I love using financial planning strategies to solve problems or prevent future ones from ever happening. And what I love most is being able to provide comfort and confidence to my clients by setting up a plan for the future. That’s the good stuff.
However, there is one component of this business that I struggle with.
Conflict of interest.
In other words, the incentives for financial professionals behind certain recommendations made for clients.
Now don’t get me wrong- this is a business and there should be a financial incentive for professionals for the service and advice that they provide. But where I have a problem with that is when the financial professional’s incentive is put before the client’s best interest.
I have done business in just about every capacity in financial services during my career. I have earned commissions buying and selling stocks and bonds within client accounts. I have received a payout from selling insurance products such as life insurance, annuities, and long-term care contracts. And I have charged a percentage fee on client investment accounts to manage their portfolios on their behalf.
There is nothing inherently wrong with any of these methods of doing business. They can just be ambiguous and abused. And when the only source of your paycheck relies on you making a sale, placing a trade, or convincing a client to invest in your portfolio, it's hard to make an impartial recommendation.
I don’t think that there are bad people (for the most part) in the financial industry. But I do believe that there are bad incentives and therefore, potentially bad advice.
Take this for an example. You’re 55 years old and thinking about retiring. You’ve had a good career with a great company, but you’re just tired. And while you feel like you’re in decent financial shape between you and your spouse, this is a big decision not to be made blindly. So, you decide to meet with a financial advisor to see if retirement is feasible. After a couple of meetings, the advisor gives you the greenlight to retire, plus a few other helpful recommendations to make sure you are covering all the bases. They also suggest rolling over your retirement plan at work into an Individual Retirement Account, or an IRA, that they will manage for you for a 1% fee. Otherwise, they will be unable to work with you. Seems reasonable. After all, you know other people who have done the same thing after they have retired.
In the words of Lee Corso, “Not so fast, my friend!”
Did you know that if you retire from your employer at 55 years old or older, you can take distributions from your retirement plan without penalty? It will still be taxed as ordinary income, but the 10% penalty for taking a distribution prior to 59 ½ no longer applies.
If you roll your employer plan into an IRA, however, that money is no longer accessible without penalty until 59 ½. So, if your main source of retirement funding is inside a retirement account, you’ll have nowhere else to turn.
In this example, who stands to benefit the most from you rolling your retirement account into an IRA?
Most advisors who manage portfolios on their client’s behalf do not make any money unless it is in an account that they can charge a fee on.
Bad incentives lead to bad advice.
That’s one of the main reasons why I started Genuine Wealth Solutions. I provide real and impartial recommendations to my clients to put them on a path to financial success. And as a fiduciary, I am legally obligated to put my client’s best interest ahead of my own. Plus, with a flat fee-only compensation structure, my clients can be assured that any recommendation I make does not come with any additional financial incentive on my part.
So, next time your friend of a friend tries to sell you a whole life insurance policy, or your financial advisor recommends a fixed index annuity, ask what’s in it for them versus other alternatives.
And if you’re still unsure, reach out to me! I am happy to provide an impartial second opinion.