Unbiased advise based on your unique personal circumstances

  • Finding trustworthy investment advice that takes into consideration your unique personal circumstances and recommends investment products aimed at maximizing your investment returns can be a challenge. Financial advisers can come across as sales representatives trying to sell you whatever investment product pays them the most commissions or fees.

    Financial or investment advisers are required to act in your best interest. Their role is to provide you with investment advice depending on your objectives and constraints (risk, return, liquidity, time horizon, etc.). This is a matter of ethics more than law, but unfortunately, the way financial advisers get paid can lead to a conflict of interest between you and them.

    Here are two examples where your adviser may have a conflict of interest.

  • Case 1: Your financial adviser works for a bank

    Banks often distribute investment products. One of the most popular investment products banks love to sell are mutual funds because companies managing mutual funds sign "distribution agreements" with the banks. This allows the bank to legally receive an “upfront sales commission” (up to 5% from your initial investment) every time they sell you a mutual fund. The banks are also legally allowed to receive “trailing commissions” (hidden fess up to 1% per year) in perpetuity for as long as you hold the mutual fund in your portfolio.

    When your financial adviser works in a bank, she will receive her salary plus commissions and/or bonuses at the end of the year based on the "upfront and/or trailing commissions" the bank received from selling mutual funds to investors like you. The more mutual funds they sell, the more money they make—regardless of the fund’s performance.

    Conflict of interest is inevitable because financial advisers have an economic incentive to recommend their mutual funds, even when they know there are other investment products out there that offer a better result, give the same diversification benefits and cost less.

    Learn how everyone gets paid from your initial investment in a mutual fund
  • What happen with your initial investment of $10,000 in mutual fund A during the first year, assuming the performance of the fund was 8.5% (before fees) and the performance for the S&P 500 was 8%?

    Initial Investment and Mutual Funds

    Your return after expenses over the year is 6.45% ($641.50 / $9,900) in comparison with the 8% return from the S&P 500

  • Case 2: Your financial advisor is a stockbroker

    Stockbrokers are agents for investors. In essence, they charge commissions every time they execute a buy or sell order on behalf of their clients. The more investors buying or selling securities, the more profits they make.

    When your financial advisor is a stockbroker, he will advertise himself as a registered professional who is licensed to execute and perform sophisticated, unique research in order to find the best investment opportunities. Unfortunately, this does not imply superior knowledge of the markets because markets are unpredictable. Stockbrokers have the same doubts, hopes and fears regarding investments as everyone else.

    Financial advisors who work as stockbrokers earn their money from investment ideas. The more ideas they have, the more chances they have of executing a trade on your behalf, even if it’s a bad idea. When the investment advice was correct and the investment idea moved in the expected direction, they will attribute this to their expertise about the market. But when the investment goes in the other direction, they will try to distance themselves from the original idea and blame the market or other bad economic news. They never lose. The only one that loses is the investor.

    Conflict of interest is something any investor should consider in this type of relationship. It will be difficult to know if your financial advisor is giving you investment recommendations based on your financial objectives or based on his expected commissions.

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