Conflict of Interest
Do Your Own Research
I was recently talking with a couple in our reader group who shared a real-life example of a situation where their research brought them to a different conclusion than what was provided by their friend and financial advisor, employed by one of Canada’s big banks. This example provided some confirmation of the pitfalls section in the Financial Advisors blog post last fall.
These readers were kind enough to share the written correspondence around this example, evaluating when to take or defer CPP payments in retirement. The detailed points and counterpoints quite thoroughly cover both sides of the decision-making process around when to take CPP. So much so I see it as invaluable to anyone at or near their irreversible CPP decision-making moment. As a result, I plan to post the back and forth, in an anonymous format, as the next blog for everyone’s benefit.
There was only one topic left unspoken in the correspondence between our readers and their friend, the advisor:
How is The Advisor Compensated
Investment advisors at major Canadian banks are primarily compensated by a percent of your assets they have under management (AUM) or occasionally by fee-based method. In the case of AUM, the bank is receiving ± 1% per year of all funds you have invested with them.
What’s the Conflict of Interest
It is for the financial benefit of the advisor and their employer the bank to have more of your funds stay with the bank longer. This directly conflicts with the strategy of delaying CPP payment five or ten years, as it means you will be taking more funds out of the bank sooner. Note this also applies to OAS, albeit to a smaller degree.
Our friendly advisor identifies to our readers he has never in 25 years recommended to defer CPP payments.
Is the Advisor not a Good Friend
No, quite the contrary. I believe they are genuinely providing the best information they have available to their friends and clients. Yet the conflict of interest remains and remains unspoken between the advisor and the reader. How very Canadian to not discuss an uncomfortable subject.
What’s the Conflicts’ Source
I believe the conflict can be sourced back to the friendly advisors’ employer, which in this case is a large Canadian bank. The bank stands to benefit from all their clients taking CPP sooner, in turn leaving more investments and increased total fees with the bank for more years.
It is reasonable to assume senior leadership at a large bank would bias advisor training towards increased investments and fees for their bank, at the expense of some individual clients. As a previous employer, I understand this only makes sense, as the bank is doing what’s best for itself and its shareholders. In fact, if the client is also a shareholder of the bank, they are effectively in conflict with themselves.
The result is this unavoidable conflict of interest between what’s best for the bank and what’s best for the individual client. And it pays out repeatedly in meetings between individual advisors and their clients. There’s nothing personal, it’s just business.
What Can We Do
We can be aware this conflict exists between our banks, insurers and other financial institutions. We can Be Prepared to discuss and challenge advisor recommendations by doing our own research and always remembering it’s our decision to make, not theirs. I compliment our example readers who did their research and made the decision that is best for them!