How to Find A Financial Advisor You Can Trust

Financial Advisors are an important part of urBetterFuture. They provide invaluable services. So how do you find a financial advisor? How do you choose a financial advisor?

One crucial factor is their motivations. They should have your best interests and only your best interests at heart. Unfortunately, this doesn’t always happen in the real world as we saw in the recent 2019 Championship between the Toronto Raptors and Golden State Warriors.

Taking Advice, the NBA Finals and Kevin Durant’s Injury

Kevin Durant (Golden Warrior States star) ruptured an Achilles tendon in Game 5 – a severe injury. Durant had been sitting out beforehand to heal a prior injury. The ruptured tendon was a non-contact injury (no strong contact with anyone). He probably should have not been playing in the first place.

So why did he play? Probably out of a sense of duty to his team. The Golden State Warriors were losing the series and Durant was feeling pressure to play. So he agreed to play. Anyway, the team’s medical staff said he was healthy enough to play. So, the risk was minimal, right?

However, the risks were not minimal. The medical team probably also felt pressure to clear Durant for playing because the team was their employer. Would they have provided the same medical advice if they had not been employed by the team?

Find an advisor who’s in your court

Kawhi Leonard’s story contrasted Kevin Durant. Leonard sustained an injury while playing for a prior team, the San Antonio Spurs. He abstained from playing for a long period despite encouragement (or pressure) from his team (this lead to controversy). He also got an independent evaluation of his injury. The Spurs traded Leonard to the Toronto Raptors. He then led the Raptors on the Championship run.

The contrast is striking. One player played before he was fully healed. The other resisted pressure to play while healing. One player exclusively took the advice of specialists who had a conflict of interest. The other acquired the advice of a specialist independent from his team. One player sustained a severe injury. The other healed and won a championship.

The worst part was Durant’s sacrifice was in vain – his team lost the series anyway. He got hurt trying to do the right thing. As a result, he possibly damaged his career and will now spend a long time healing. I can’t think of a more apt, sad metaphor about conflict-free financial advice.

The Pitfalls of Trying to Find a Financial Advisor

Financial Advisors often do not have to represent their client’s interests best interests. Financial Advisors in North America have a “suitability” standard rather than a “fiduciary” or client’s best interest standard. Their advice just has to be suitable. That is hardly reassuring.

Financial Advisors can receive commissions and other compensation for selling certain commissions. This encourages financial advisors to neglect their client’s best interest in favour of their own compensation. This is a classic conflict where the financial advisor’s roles as a salesman and advisor conflict.

So what happens when they have incentives to sell products that are not in the best interest of the client? For example, what if they have to choose between recommending a better performing, low fee index fund versus a higher risk, high commission, high fee exotic mutual fund?

Finally, Financial Advisors’ employers can be a source of conflict. Sometimes the organization’s interest is different than the client’s best interests. For instance, Wallstreet banks encouraged their clients to buy subprime stocks that they were dumping themselves during the 2008 meltdown.

These factors encourage financial advisors to prioritize their own interests over their clients’ interests because… well, lambo bro!

Screen Financial Advisors and Minimize Their Conflicts

A fee-only advisor can minimize conflicts of interest. Fee-only advisors do not accept third-party incentives and often work on an hourly pay rate. This eliminates conflicts of interest. Furthermore, it’s important to have a financial advisor that educates and advises. An example is Good Investing, where Tim Nash provides investment coaching and accepts no incentives from third-parties. I have worked with him personally and recommend him. Also, this post provides a useful set of questions to find a financial advisor and screen for potential conflicts of interest.

It’s important to look for conflicts of interest throughout your life. Non-traditional “financial advisors” such as politicians, real estate agents and media commentators all impact your financial life. They recommend what to buy, what economic policy to choose and how to vote. And they all can have conflicts of interest. For instance, politicians could promote policies that benefit their contributors instead of the public. A real estate agent could pressure clients into buying an unsuitable house to gain a commission. A media commentator could recommend a brand without disclosing their connection to the brand.

Environmental Issues and Conflict of Interest

As I have argued in an earlier post, your most important investment is the environment so you need money advice that takes into account the importance of this asset. Unfortunately, a lot of advice undervalues our environment, encouraging short-term benefits for long-term pain. This has been recognized by some such as the EU which is proposing an environmental component to their fiduciary standards.

This cause is often a conflict of interest. Groups like politicians, investment managers, commentators and business executives will encourage myopic environmental destructive activities like the deforestation of the Amazon and burning of coal. It makes them a lot of money short-term but leaves the general public with larger long-term costs. They benefit greatly short-term and everyone else pays the long-term bill.

Meet Rex, a Conflicted Advisor

Rex Murphy is an example of a commentator providing bad conflicted financial advice. His advice is not competent. He criticizes climate change despite not understandings key concepts like the difference between climate and weather. His media credentials are impressive but he has little professional experience or academic credentials related to climate change or science. However, he is a paid speaker for the oil-lobby CAPP and Canadian petroleum companies. So it’s unsurprising he strongly promotes Canada’s Petroleum industry and bashes climate change science.

The problem is he doesn’t disclose this motivation when raging against environmentalists or climate change in his columns and television appearances. He misrepresents climate change science because his short-term gain (nice media career, compensation from the oil industry) is based on your long-term pain (a less inhabitable environment). Basically, he’s trying to trick you into trading urBetterFuture for his better now. That’s why he doesn’t disclose his paid relationship.

Final Thoughts on How to Find a Financial Advisor

Not all financial advisors will screw you over even if they are encouraged. Some financial advisors will act in their client’s best interests regardless of their employer or commission. Conversely, some financial advisors with few conflicts of interest may still not advise in their client’s best interest. As the Wall Stree Physician notes, you can’t completely eliminate conflict of interest. Humans are clever creatures, and if they want to scam, they will always find a way to “game” the system regardless.

It’s ideal to find a financial advisor with no conflicts of interest, but above all your Financial Advisors’ conflicts of interest should be transparent. Then it’s easier to evaluate the suitability of their advice. For example, you will probably have a very different perspective on a recommended investment once you learn your advisor will receive a hefty commission selling it. The fundamental thing is being aware of conflicts of interest.

urBetterFuture will be much brighter if you can identify these conflicts of interest and then weed out the resulting bad advice and advisors. Get rid of them. Otherwise, you won’t be pursuing urBetterFuture. Instead, you’ll be pursuing someone else’s.

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Banner photo courtesy of Rafael Matsunaga, https://creativecommons.org/licenses/by/2.0/