You’re not feeling well, so you go to the doctor. There’s a great medication for what’s ailing you, but the doctor won’t give it to you. The reason that medication wasn’t prescribed is that the company that makes that medication doesn’t pay your doctor. Instead, the doctor gives you another medicine that he says is a “suitable” replacement. After taking the “suitable’’ medication for a while you try to schedule a follow-up appointment. The doctor informs you that he’s not obligated to check in to make sure that the medicine prescribed is working.
I know this scenario sounds farfetched. But believe it or not, this is essentially the kind of agreement that millions of folks have with their financial professional!
On today’s show, we talk about how to make sure “pay to play” scenarios aren’t impacting your financial planning. We also discuss some important questions you should ask potential advisors to make sure your best interests are protected.
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What is “pay to play”?
Many investors think that buying into an investment is as simple as asking your financial professional to buy it for you. However, whether you’re working with a broker, a large financial firm, or managing your portfolio online, revenue-sharing deals between your platform and various funds often determine what products are actually available to you.
Now there can be some legitimate reasons to have this kind of structure in place. For example, a larger firm might worry that a small fund that can’t pay its fees isn’t going to be successful enough in the long run to recommend to its clients. Other funds might not pass a firm’s due diligence or insurance requirements.
But the danger to investors is that if you’re unclear about the terms of your engagement, you could be working with an advisor or broker who’s recommending investment products just because the firm that created the product is paying them to do so.
If you’d like to read more about how pay to play sometimes works in the financial industry, I recommend this recent article in Barron’s.
What is the suitability standard?
The reason that some financial professionals can work like this may be that they’re operating under the suitability standard. Essentially, these folks are salespeople. They are not obligated to sell you products that are in your best interests. Plus, after they deem the products “suitable” they are also not obligated to reevaluate the products that were sold. Unfortunately, there can be a lot of wiggle room when it comes to what is considered suitable.
As a fiduciary firm here at Keen Wealth Advisors we are legally accountable for acting in our clients’ best interests. We develop long-lasting relationships that are based on full disclosure, total transparency, and trust. Our employees at Keen Wealth are not winning a monthly sales contest based on how you invest your money. We don’t have any pay to play arrangements. And unlike that broker who doesn’t have to check on how your investment is doing; we meet with our clients at least annually to do a thorough review of your financial picture.
What are my financial professional’s conflicts?
It’s important to note that the pay to play scenarios I’m describing are legal. Advisors and brokers who adhere to the suitability standard generally aren’t breaking any laws. They’re doing what they’re legally obligated to do: clear the low bar of the suitability standard.
Legal or not, there’s an obvious conflict of interest here. These financial professionals may likely choose to sell products that make them the most money. Maybe those products are good for your portfolio, and maybe they’re not. Either way, the investor’s interests often take a back seat to the financial professional’s bottom line.
The easiest way to safeguard yourself is to work with a Registered Investment Advisor (RIA). When a prospective client comes into Keen Wealth, my team thoroughly explains our standards of engagement. We also provide folks a list of questions that they should be asking other financial professionals they’re interviewing, such as:
- Do you operate under the fiduciary standard?
- How do you get paid?
- Do you receive a commission on any of the products you recommend?
- What are my all-in costs?
- What is your investment philosophy?
- Do you have any conflicts of interest with the financial products you recommend? If so, can you please show me where they are described in your paperwork?
Anyone who would like a more thorough list of questions to ask a prospective advisor can email me and I’ll send a copy. If the person you’re considering doesn’t provide clear answers to these questions, take your money elsewhere.
I’m happy to share this information with folks, even if they decide to work with a different RIA, because I appreciate what a personal decision this is. You should be working with a fiduciary advisor who makes you feel comfortable and well cared for. But you also need to make sure your advisor keeps your best interests and your life goals at the heart of every decision.
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Got a question or comment? Email it to me and we’ll get back to you or call our office at (913) 624-1841.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.