Opinion: Conflicted advisors – when weekly sales targets take priority over client care

Is the conflict of interest really down to the advisors themselves – or is it a problem with the system?

The following opinion article was produced by Declan Ramsaran, managing director of PANGEA Private Family Offices.

Analyzing data provided by three Canadian institutions, a recent University of Chicago, Booth School of Business study entitled, Costly Financial Advice: Conflicts of Interest or Misguided Beliefs? states:

“A common criticism of the financial advisory industry is that conflicts of interest compromise the quality, and raise the cost, of advice. Many advisors require no direct payment from clients but instead draw compensation from commission payments on the mutual funds they sell. Within this structure, advisors may be tempted to recommend products that maximize commissions instead of serving the interests of their clients.” 

Much has been written on this topic, however, in this article, I will highlight a different perspective worthy of consideration. I suggest that a significant enabler for the conflict of interest is systemic rather than being exclusively advisor centric. You see, advisors are only doing what they have licence to do within a system that supports, and in most cases, mandates their behaviour. 

Most advisors working within larger institutions will be familiar with the following terms: key performance indicators, personal performance assessments, and the performance matrix.  These tools are used to manage advisor productivity. While the aforementioned are invaluable business management tools, they are strongly influenced by overriding corporate pressures to maximize profitability. 

Maximizing profitability is perceivably a good thing for shareholders - however, it does partially come at the cost of conflict-free client advice. One real-world example of this occurred where advisors were mandated to cross-sell credit cards to their wealth management clients (much to their chagrin). Corporate mandates for inclusion of non-core wealth management solutions as a performance metric on the advisors’ performance assessment meant that advisors, in order to perform well on the job, had to sell what the institution mandated them to sell. Clearly their hands were tied. Any meaningful change to the conflict of interest issue will have to come from the institutions that mandate advisor performance indicators.

Of course, individual institutions should never be asked to bear this burden alone as competition for market share is fierce. Asking a few institutions to lead the systemic change would create an unfair advantage to others lagging the change. Regulators will have to support this change and have already begun to support sector wide changes with the implementation of CRM2, for example. However, some advisors in order to avoid the CRM disclosure to clients are behaving badly by shifting client assets into insurance solutions that fall outside the regulatory boundaries of CRM2 disclosure. But the question still remains: are clients educated enough to make effective decisions based on CRM2 disclosure? As most of us know, price is generally a poor indictor of value.

Over the past 15 years in this business, most advisors that I have talked with are just trying to provide a good life for their families. They generally have little, meaningful, influence on corporate mandates and work really hard to balance between doing what’s right for clients and satisfying the performance metrics of their jobs. Sometimes, their weekly sales targets may take priority over client care. This is an issue with the system, not the advisor. 

The University of Chicago study concludes by offering insight into the underlying cause of costly advice, as their results have important policy implications. The study suggests that regulations that attempt to eliminate conflicts of interest may prove ineffective.

Declan Ramsaran is the managing director of PANGEA Private Family Offices. The views expressed do not necessarily reflect the opinion of PANGEA or of Wealth Professional.
Do you have a reaction to Declan’s views? Please leave a comment below with your thoughts.