By Wikipedia definition, conflict of interest is a situation in which a person (or organisation) is involved in multiple interests, financial interest, or otherwise, one of which could possibly corrupt the motivation of the individual (or organisation).
A conflict of interest situation is something that nobody ever wants. We want people whose interests are aligned to our own, especially when it is our money and future that is at stake.
In the corporate world, shareholders are always working hard to reduce the conflict of interest situation that their management faces. Bonuses for CEOs are not only tied to profits for the year, but also to the future performance of the company, with possible clawbacks if sustained performance is not achieved. Employees are also sometimes given bonuses in the form of company’s stocks to give them incentive to help the company grow.
In the personal finance space, we should be expecting conflict-of-interest-free advice from the professionals that we talk to and trust. But are we getting that? More importantly, do our actions even suggest that we want it?
What Are We Paying For?
Most financial advisors would refer to the people whom they work for as their clients. However, there is some inaccuracy in using that term. A client is usually a person who pays a fee or a retainer to the people who are servicing them. For example, we pay lawyers for the time and advice they provide us. We pay our doctors a consultation fee even if we do not end up buying any medicine.
Do we pay our financial advisors a fee for the time they spent advising us?
For most people in Singapore, the common answer is “no”. We demand good independent advice from the advisors we meet. Yet, we don’t expect to pay for it. So who exactly are paying our advisors? That’s an easy answer, the company that they represent.
It is worth remembering that whoever pays a person’s salary is ultimately the party who will have the biggest say in the actions of the person. For example, high commission paid out for Investment-Linked Policies (ILPs) will provide greater incentive for financial advisors to push out such products to their customers clients, even if it is not good for them.
It is convenient to suggest that MAS should take a harder stance to ensure that financial advisors are independent. But simply saying that is not enough. Our actions need to be aligned with it.
Getting Educated For Ourselves
Of course, just because we are paying for advice does not mean it would automatically be good. As it is, there are many advisors out there in the market who might be nothing more than just insurance salespeople. If consumers are paying for advice, they would expect higher quality advisors.
In order for us to differentiate between a good advisor and a poor one, would be to have at least some basic knowledge of personal finance matters. If we have some knowledge, it would be easier to tell if someone is giving us good advice, or simply making a sales pitch.
The same logic applies to other financial instruments. When it comes to buying or selling a property, our agents have the incentive to simply push for transactions. In the book Freakonomics, the author Steve Levitt and Stephen Dubner shared how housing agents are always fetching higher prices for their own homes, compared to the homes of their clients.
How do we as homeowners prevent that from happening? Simple. We get educated. We check and find out for ourselves what our neighbours are getting from the sale of their house. We don’t just simply sit back and accept any price that our agents present to us. That is call doing our homework.
Likewise, when it comes to buying stocks or investing in a unit trust, we all have to do our fair share of homework. We cannot simply rely on what our stockbroker says, or what the charming personal banker is trying to convince us to invest in.
We believe that as individuals, we can and should move away from conflict of interest situations in the personal finance space. By getting yourself educated in financial matters, you can make much better financial decisions for yourself and your family.