Managing The Conflicts

By Mark Barnicutt, MBA, FCSI, CFA on April 4th, 2011

With the consolidation in the global financial services industry over the past few decades, it’s becoming increasingly challenging for investors to ascertain if the investment solutions that are recommended for their portfolios are truly objective and in the best interest of ”the client” or the best interest of the “investment firm”. Asset Management offerings — like any other manufactured item — are comprised of at least five (5) service components:

  • Individual Securities (ie: the individual stocks and/or bonds)
  • Investment Management (ie: the people who “pick” the stocks and/or bonds)
  • Brokerage (ie: the people who trade the stocks & bonds for the Investment Managers)
  • Custody (ie: the people who hold the clients’ securities)
  • Portfolio Advice (ie: the people who structure a portfolio to match your investment objectives & risk tolerances)

The challenge for investors is to determine if each of these services are being provided in the “best interest” of the client — ie: an objective, transparent and competitively priced manner. I certainly recognize the difficulty that most investors would have in being able to determine whether or not they’re being treated fairly in such investment management offerings, so as a “Rule of Thumb”, I always suggest that if ONE firm is performing MORE THAN ANY ONE of the above functions, you should be prepared to ask questions in order to provide yourself with the comfort that you’re being treated fairly by all service providers.

The following sets of questions are good ones for investors to ask of their wealth advisory firm:

“Why have you chosen that service provider?”
“How are their services priced compared to other similar industry service providers?”
“Under what circumstances can the services of that service provider be terminated?”
“Please provide me with a list of all of your firm’s conflicts of interest.”
“Please provide me a copy of your firm’s Conflicts of Interest Policy.”
“How does your firm manage these conflicts of interest so that the interests of clients are protected, and placed first?”

By asking these questions, you, as the investor client, should typically enable you to understand whether the service providers have been chosen for your benefit or your investment adviser’s convenience!