Conflicts of Interest in Financial Services: How Every Investor Can Learn to Spot Them

March 31, 2017

Conflicts of Interest in Financial Services: How Every Investor Can Learn to Spot Them

2008 is a recent reminder of how conflicts of interest can play out in the financial industry. Since 2008, regulations – namely the Dodd Frank Wall Street Reform and Consumer Protection Act – have been passed and implemented in an attempt to decrease the risks of such a financial crisis happening again.

A conflict of interest is anything that puts the investor at risk for the personal gain of the financial professional. Such conflicts of interest generally put the interests of the professional ahead of the investor, and in some cases can even cause harm to the investor as a result of a financial professional’s outside interests.

As an investor, there are certain conflicts of interest you can learn to spot – and avoid – to help protect yourself and your money from potential harm by representatives of the financial industry.  Here’s a quick rundown every investor can use to spot conflicts of interest and ways you can avoid or minimize your exposure to conflict risks.


Commission-based financial service

Understanding how the financial professional you work with is compensated is the easiest way to spot a conflict of interest, as well as the most common form of conflict. Simply follow the money, and you will know whether or not the advice he or she is giving you has the potential to be motivated by something other than what’s in your best interest.

Commission-based financial services are often times brokers of financial institutions that sell financial products to investors. Examples of financial products sold on commission are insurance, annuities, securities, and alternative investments.

Investor Tip

You can find out how a financial professional is compensated by asking and understanding the following:

  1. Are they a broker or insurance agent?
  • If they are, they are paid on commission and you know that going into the relationship. You can ask them how much commission they make on the products they recommend and which ones they use personally.

2. Are they a fee-based or fee-only financial advisor?

  • If they are fee-based, then they DO sell products. These financial professionals are compensated by the fees they charge their clients and from the fees their clients pay for the products they recommend.
  • If they are fee-only, then they do not sell any financial products. These financial professionals likely charge a percentage on the investments they manage on your behalf. This fee structure inherently has less conflicts of interest.

3. Are they held to the Fiduciary Standard?

  • The Fiduciary Standard of Care requires that a financial advisor act solely in the client’s best interest when offering personalized financial advice.
  • Find out if they are regulated under the Investment Advisers Act of 1940. This federal law regulates investment advisers by the Securities and Exchange Commission (SEC) or appropriate state authorities and requires them to provide services to their customers under the fiduciary standard.
  • CERTIFIED FINANCIAL PLANNER™ professionals providing financial planning services also must abide by the fiduciary standard.


Kick-backs and incentives

Perhaps a less commonly talked about conflict of interest is when a financial professional serves to gain something other than money. These conflicts can be much more challenging to spot, because they often come in the form of professional referrals, services, or other perks.

As an example, a financial professional may recommend a certain tax professional to her clients who provides tax services to her firm for a reduced fee or no fee. While it is quite possible that this is an innocent symbiotic business relationship, there is an inherent conflict present that should be disclosed to clients.

In other instances, a financial professional could receive gifts in the form of goods, outings, or travel from outsourced service providers that also present conflicts of interest. We may understand this conflict more easily as it’s been speculated about in the healthcare industry: physicians who receive money or incentives from drug companies are influenced to prescribe certain drugs to their patients more than other drug brands (ProPublica).

Financial advisors are generally not allowed to accept referral fees in any sense, and that includes referral links and advertisers on their websites.

Investor Tip

Under the Investment Advisers Act of 1940, investment advisers are required to disclose conflicts of interest in Part 2 of Form ADV.

  • Always request a copy of Form ADV from your financial professional and make sure you fully understand it.
  • Ask questions if anything is unclear.
  • Take a close look at Part 2, which requires investment advisers to prepare narrative brochures that include plain English disclosures of the adviser’s business practices, fees, conflicts of interest, and disciplinary information.
  • Make sure that you are receiving annual summaries of any material changes to the brochure along with either a revised brochure or an offer to deliver a copy of the revised brochure.


Sponsorships, endorsements, and media

Other potential conflicts of interest you can learn to spot come in the form of sponsorships, endorsements, and media. Financial brands can benefit from partnerships with other companies who want to gain exposure to their audience and client base and vice versa.

To date, there are no clear rules in the financial services industry that address these potential conflicts of interests since these are newer circumstances as a result of technology and social media.

A financial professional may not be compensated by selling a particular financial product, but they may be compensated by outside parties in the form of money or media exposure for endorsing certain brands or products, like a banking institution, insurance company, or identity protection service as an example. If they are, they are not required to disclose it to their clients unless it is more than 10% of their revenue or time.

Investor Tip

The most important thing is for an investor to be aware that this is a new potential form of conflict, and you should use your own discernment when choosing which companies to work with, regardless if your financial professional has a formal relationship with them.

  • It’s not a bad idea to ask a financial professional about the other ways they are compensated outside of their official fee structure.
  • If you know they are a spokesperson for another brand, feel free to ask them why they aligned themselves with that brand or product.
  • Understand that an endorsement of a brand is not a personal recommendation to you. Be sure to have a conversation with your financial professional about what is in your best interest.
  • The fiduciary standard still applies, even in the presence of this potential conflict.


When you as an investor are aware of the potential for conflicts of interest, you are able to enter a relationship with eyes wide open. Knowing what to spot should help you make the most informed financial decisions for you and your family.



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