Is your adviser on your side?

Many investors seek help in managing investments. The quality and type of help they seek can vary dramatically depending on one small detail, who is paying their adviser? If you are paying the adviser, the adviser should be working for you. Most importantly, it is important to understand the nature of the relationship between you, your adviser, and the investments that the adviser recommends.

There are really three sorts of advisers. Firstly, there are advisers who could be termed Fiduciaries.  These advisers work solely on behalf of the client. This means simply that they accept no payment from any investment or investment company. Their only loyalty is to the client.

Secondly, there are brokers. Brokers such as share brokers are paid to “broker” a transaction between two parties. They are often paid by both parties to do this. Since they essentially represent both parties in a transaction they actually don’t have any loyalty to one or the other.

Thirdly there are agents. Agents are the opposite of fiduciaries. They work solely on behalf of the institution, such as a bank or insurance company. Their loyalty by definition is to their employer, whose products they must represent. If this person sounds like a salesman, it’s because they are.

What is wrong with the broker or agent model when it comes to financial advice? When you go to a broker or an agent with a financial problem they will certainly try to help you. They could be fantastic listeners and appear to be very helpful. The problem occurs when they offer you a solution. For example, a broker will listen to your problem and determine which product or investment will be suitable to help you. The problem is investment providers pay brokers for access to client portfolios. Unfortunately, the broker may be tempted to recommend the product or investment that pays them the best commission.

An agent actually doesn’t even have the liberties afforded to the broker. The broker can at least select amongst many investments, but an agent is obligated to represent a certain brand of products. For example banks often repackage investments such as unit trusts and add a significant margin on products that are available elsewhere.

Why do we believe that the fiduciary model is the most appropriate model? Under the fiduciary advice model the only person that pays the adviser is the client. The adviser represents the client to the financial world, rather than representing the financial world to the client. As a result, they use their knowledge to find and recommend lower cost investments that often have broader diversification and no conflicts of interest. In other words, by and large they recommend superior investments for less cost.

It’s amazing to us how many times we’ve reviewed the portfolios of clients who have been working with banks, only to find the portfolio loaded up with that bank’s proprietary products. Banks use agents (employees of the bank) to sell their investment solution. Should we be surprised that the bank agent actually recommended to their clients that they invest in the bank’s own products? Is this the best solution for the client or the bank?

Irrespective of what type of adviser, be it a fiduciary, a broker, or an agent, your adviser is legally required to put your interests first. We consider that this requirement may be difficult to achieve when your adviser is limited to only being able to offer investment solutions from a very limited range of investment providers.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.