Conflicts-of-interest are never in the client's best interests.
One conflict for advisors is that they make their money on transactions. The more transactions they execute, particularly involving investment products with high commission rates, the more they earn. This can lead to churning of your account – the high level of trading has more to do with generating brokerage commissions than growing your nest egg.
In the case of mutual funds , the advisor continues to receive what is known as a trailing commission for as long as you own the fund. The more they sell you, the greater their ongoing commissions. Due to a conflict of interests they may not encourage you to pay down high interest credit card debt. This is also why some less than ethical advisors may encourage you to borrow to invest- the more you own in mutual funds, the greater their income. Such advisors rarely recommend lower cost products like ETF's because they do not pay trailer commissions. This borrowing may be in addition to your other household debt so your risk profile is greatly magnified.
Equity mutual funds typically pay a 1% trailer commission while bond funds pay 0.50 % thus incentivizing advisors to create higher risk portfolios. If a conflict-of-interest arises ,this may unduly increase portfolio risk.
Advisors selling proprietary products may earn a higher commission than comparable third party products .
Advisors charging flat fees have an incentive to add more clients and potentially do less work for each one. You need to assess whether you are receiving value for money.
Fee-based accounts are often mis-represented “I charge 1.5% of assets I manage, so I only make more money if you do” is an enticing but misleading sales pitch. Most people don’t do the math, and don’t realize that 1.5% of $1 million amounts to $15,000 a year — a fee they likely would resist paying if it were transparently stated as a dollar amount rather than as a percentage. Moreover, in such accounts, fees are deducted directly from a client’s account, and so tend to be forgotten.
Charging clients on total assets basis often presents more serious conflicts-of-interests than those faced by brokers because the conflicts may involve much more money than the value of a trade. Here are some typical situations where asset-based fee compensation poses conflicts for advisors:
•When advising a client to roll over a RRSP for the adviser to manage, even when the client has equivalent and less costly options if they leave their funds with the employer’s fund manager.
•When advising a client not to pay off a mortgage (thus diminishing assets), even when the mortgage carries a high interest rate.
•When advising against making a large charitable contribution to get a tax deduction (but decrease assets under management).
•When advising not to give large gifts to children to avoid estate taxes.
•When advising not to buy a larger home.
•When advising not to buy an annuity or set up a charitable annuity.
•When advising a client not to invest in real estate.
In all the cases mentioned above there may be good and impartial reasons for an advisor’s recommendation, but in all these cases and many others the temptation to protect or enhance the advisor’s own compensation is omnipresent.