Conflicts of Interest

BCM clients are well-aware of the many conflicts of interests that financial services firms can potentially have with their clients.  An article recently published in The New York Times (via Bloomberg) shows a perfect example of how a supposedly prestigious Wall Street firm is no exception.

Conflicts can arise when a firm is being paid or compensated to do something that is not in a client’s best interest.  For example, Firm XYZ is paid to sell investment products.  Fund C Minus is a fund with relatively poor performance, but it pays a big commission to whoever sells it. Meanwhile,  Fund  A Plus is a fund with good performance but pays very little commission. Having seen it myself,  I can tell you that a surprising number of investors who go to Firm XYZ for help will end up owning Fund C Minus.  This doesn’t mean that everyone at Firm XYZ is a crook.  It’s just the nature of its business. Firm XYZ is in the business of selling products, so it’s only natural that it would want to sell the most profitable products.

Of course, not all firms operate that way.  For example, BCM is registered investment adviser (RIA), and a 100% fee-only, advisory-only firm. This is significantly different from firms that operate as brokers and agents (If you are not familiar with the differences between brokers and RIAs please request our white paper “RIAs and Fiduciary Duty.”)  Clients hire us to represent their investment interests, and that is all we do. We don’t have any investment products to sell, we are not controlled by any third parties, and we never accept any third party compensation (client advisory fees are our only source of income).  This helps to eliminate conflicts of interests and helps to ensure that we are always on the same side of the table with our clients.

Victor K. Lai, CFA

This blog is for informational purposes only. Nothing on this blog constitutes investment, tax, or legal advice. You should conduct proper due diligence and / or consult with professional advisers before taking any investment action.

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