Is Your Adviser Acting In Your Best Interest?

If you’re a return visitor to this page, you’ll know that I’ve spent a lot of time discussing the Fiduciary Rule, and what it truly means when someone is acting in your best interest.

This article discusses the behavior of investors within the same investment, but that investment is branded differently.  Let me explain:

A common practice in the mutual fund industry is for a parent company to own several ‘brands’ of mutual funds.  In this case, Waddell and Reed owns and manages the family of funds known as ‘Ivy.’  Here’s the statement directly from their website disclosures:

IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠ are managed by Ivy Investment Management Company and are distributed by Ivy Distributors, Inc., InvestEd℠ Portfolios are managed by Ivy Investment Management Company and are distributed by Waddell & Reed, Inc., and WADDELL & REED ADVISORS FUNDS® mutual funds are managed by Waddell & Reed Investment Management Company and are distributed by Waddell & Reed, Inc. These financial products are offered by prospectus only. Waddell & Reed Financial, Inc. is the ultimate parent company of Ivy Distributors, Inc. and Waddell & Reed, Inc.

Got all that?  The point here is that you’re very unlikely to know when a fund family is a parent/child of another company.  It’s always buried in the disclosures somewhere, but what’s the chance you’ll read those?  

The story above details a study of investor flows out of two mutual funds ultimately owned by Waddell and Reed.  They have different names, but are the exact same fund, run by the same people, just sold by someone different.  

Guess what was the very predictable finding?

Who sold the fund, and how they’re paid, made a difference in whether investors held onto it or not.  The fund had a terrible track record, which should obviously move people to sell it.  In the middle of their page you’ll see a bar graph that reflects the clear differences when an adviser has an incentive to keep you in an investment (left) vs when there is no incentive (right).

The Waddell and Reed advisers, paid by the fund, were less likely to tell their clients to sell it.  The same exact fund, with an Ivy brand, is sold outside of Waddell and Reed.  As you can see, those advisers dumped it at almost three times the rate of the others!!  This isn’t specific to these companies, the article and graph show you a few more examples of how this re-branding can affect adviser decisions.

As they say, a picture is worth a thousand blog posts.

This is the most elegantly simplistic look at a typical conflict of interest in the financial services world, and one you’d really never stumble on unless someone was doing some serious digging.  This self-dealing happens constantly throughout the industry, and usually only surfaces to the press through lawsuits, like this one, or this one.  Or this one…or this one…or this one

Spot any trend?  If a company makes financial products, and their representatives get paid more for selling them, greed is going to take over.  Your money is going in something that makes that person more money, very often at your expense.

What’s the solution to this product issue?  Awareness, for starters.  Consumers need to be aware, as the gentleman in the article mentions, that “if there’s a brand on their card and the brand of investment they’re recommending matches that, I’d have very heightened awareness and I’d ask a lot more questions.”

Also, asking the adviser directly how they get paid is vital, and you shouldn’t be shy about doing so.  I’ve written here before that the adviser should not have a hard time answering that simple question.  If you’re confused by the answer, that should raise a red flag.

As the Fiduciary ruling takes hold, financial companies are going to be rolling out new disclosures, and lots of them.  Chances are slim that anyone will read them.  Instead of these transactions happening in the back rooms with a wink, the companies and advisers are going to put it in print, and maybe even verbally tell you that they have a conflict of interest.  After all, revenue is on the line, and they’re willing to gamble you’ll shrug it off.  

So I’ll go one step further:  Why put yourself in the situation where you willingly accept it?

An adviser that receives commissions based on products has a natural, unavoidable conflict of interest with you.  Even if they acknowledge and disclose it, you now know that your dollars are in the hands of someone that has an incentive to act differently than what may be best, and trust me, they know too.  Maybe that conflict is okay with you and never surfaces, but the easiest way to avoid a future problem is not signing up for it in the first place.

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