Two of the most misunderstood and abused words in the financial service industry are “independent” and “independence”. These words have very positive connotations when financial advisors sell advice, services, and products. However, they are also very dangerous words when financial advisors misuse them in their sales pitches.
Unsuspecting investors believe they are receiving independent advice. They assume the independent advice is in their best interests. They assume there are no conflicts of interests because the advisors are independent and not beholden to company interests or their own need to produce revenue and income.
But, what if independence is part of a slick sales pitch that is designed to mislead you into buying what the financial advisors are selling? Following are three tips that will help you identify advisors who have turned a positive word into a deceptive sales practice.
1. Licensing & Registration
Your best odds of selecting a real independent financial advisor is to limit your selection to a professional who is a Registered Investment Advisor or an Investment Advisor Representative who does not hold any securities licenses. This registration limits the financial advisor’s compensation to fees. And, because there are no securities licenses there is no broker/dealer influencing what the advisor sells you.
2. Commission Compensation
Be extra cautious when the financial advisor’s only method of compensation is commissions. That’s because third parties (broker/dealers, mutual fund companies) pay commissions. Who does the advisor work for, you or the companies that pay them? It is hard for advisors to deliver independent advice when they are impacted by this core conflict of interest.
3. Proprietary Products
Did an advisor recommend investment or insurance products that are manufactured by his employer or the company that holds his licenses because they are best? This is a critical question you should ask any advisor who claims he is providing independent advice, but limits your choices to his company’s products.
There is a high probability this financial advisor has a major conflict of interest that he is hiding from you when he claims his advice is independent and in your best interests. Companies pressure advisors to sell their products because they make more money. Some companies even go so far as to withhold benefits from advisors who do not sell enough company products. That’s the stick. The carrot is advisors make more money and perks if they sell what the company wants him to sell.