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Can Doctors Diagnose Financial Advisors' Conflict of Interest?


It's a major conflict of interest when the financial advisor is also receiving kickbacks from mutual fund companies and insurance accompanies.

This week, a doctor came to my office for a second opinion financial review.

He explained why he came to see me: He bought a permanent life insurance policy because his financial advisor told him it is a great investment. He has been paying $2,500 a month for that, and so far he has put in roughly $60,000. Recently, he needed some cash and called to redeem the policy. Much to his surprise, the surrender value is only $1,300. He became suspicious of everything in his portfolio and wanted me to examine it for him.

It took me only five minutes to diagnose that his portfolio is suffering from a terminal cancer - conflict of interest.

It's a major conflict of interest when the financial advisor is also receiving kickbacks from mutual fund companies and insurance accompanies. It's like if all physicians are on Big Pharma's payroll - that would be a conflict of interest.

It is actually very easy to diagnose such a common disease in the financial industry. I am going to illustrate how I did it using this doctor as an example while concealing his identity.

His financial advisor is charging him 1.2 percent a year to manage his investment. For that much, one would expect him to act in the best interest of the good doctor.

The portfolio consists of multiple mutual funds. I put the first fund (VAFAX) and the last fund (ODMAX) under the microscope, i.e., Google. I found exorbitant costs that benefit the financial advisor himself.

Front load can be thought of as a mutual fund’s kickback to the financial advisor for directing his clients’ money to the fund. This doctor has about $1 million in investable assets; by putting his assets in high-kickback funds, the financial advisor made over $55,000 before the doctor left his office.

Expense ratio is the cost of managing the fund. Why is it so much higher than Vanguard’s? Because it contains an ongoing kickback to the financial advisor for his effort in keeping his client sedated, while the financial industry goes on to surgically remove his wealth.

At this rate, the doctor’s financial advisor will definitely have a secure retirement, funded by the doctor. If this is not a cancer in the financial sense, I don’t know what is.

There are two simple ways to avoid this:

1. Use Google. It will show you the load and expense ratio of funds your financial advisor recommended to you. If it contains any load at all or an expense ratio higher than 0.5 percent, your advisor is not working for you.

2. Ask your advisor this question: “Are you are registered representative (of a broker dealer)?” A registered representative is a licensed salesman who is compensated by commissions. If his answer is yes, he is surely not working for you.

It would take another post for me to explain the distinction among financial advisors. Ninety-three percent of financial advisors are licensed salesmen of financial products compensated in part or in whole by financial and insurance companies. Only seven percent are pure advisors.

They all call themselves financial advisors. It's like Pharma sales reps calling themselves doctors and begin prescribing drugs. Most broker/dealers don't disclose their true nature so it is impossible to tell. On top of that, there are dually registered financial advisors, who can both give advice and sell. That's one added level of duplicity.

Doctors, for the sake of your financial health, do your afore-mentioned two things and you can keep the cancer of conflict of interest away from you.

Find out more about Michael Zhuang and our other Practice Notes bloggers.

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