Ep. 8 – 21 Questions (Series) – 7. Can you tell me about your conflicts of interest, orally and in writing?

Welcome to the Real Retirement Financial Planning Podcast. 

This series covers the 21 Questions to Ask Your Financial Advisor. 

The list of questions was inspired by Jason Zweig of the Wall Street Journal, and his blog post: The 19 Questions to Ask Your Financial Adviser.

Responses to Jason’s questions I read from other advisor websites lacked depth.

“Yes,” or “no,” sometimes needs more context and a greater explanation into the whys.

The goal of this series is to target the essence of what I think Jason is trying to protect you from, and help you make a better educated decision.

21 Questions to Ask Your Financial Advisor

7. Can you tell me about your conflicts of interest, orally and in writing?

Jason is looking for a “Yes” here, and “no adviser should deny having any conflicts.”

Yes, MARGIN will disclose all conflicts of interest in writing. 

Our main objective at MARGIN is to work with clients that want to pay a fixed annual fee for a long-term relationship.

We don’t mind if you need to take assets out to purchase something else.

The incentive structure an advisor practices says a lot about the type of person they are, and their personal values.

Compensation/incentive structures:  

(1) Commission

(2) Asset-based fees

(3) Hourly

(4) Fixed/retainer

(5) Net worth and income (new to the block)

The conflicts of interest in an asset-based model:

When a lot of money is deposited or withdrawn from a fee-based account a conflict of interest is created. 

Advisors compensated by assets under management have an incentive to bill on as many assets as possible.

This creates an issue with major decisions involving financial planning near your retirement. 

Whether you should pay off your mortgage

What they (may) say…

  • Don’t pay off the mortgage because we can earn a higher return with your portfolio.
  • A fee-based advisor earns more when you don’t pay off your mortgage. Assuming the money came from a managed account they bill on.

What they (most likely) don’t say

  • Usually you’re in a moderate portfolio nearing retirement to protect against sequence of return risk. If the interest rate on your mortgage is 3% to 4%,  earning the higher spread investing the balance you’d use to payoff your loan is not a given.
  • Maybe you have a really low interest rate on your home, or you’re in a high tax bracket, and you need the interest deduction…Okay…
    • Just remember, (usually) your tax deduction from the interest on your loan each year declines as the loan matures. That’s amortization.
  • Maybe you’ve got all your money in a qualified account like an IRA, and taking out a big lump-sum from the IRA would cause your tax bracket to skyrocket…Okay…
    • No sense in paying Uncle Sam more than he’s due to knock out the mortgage. It depends on your situation, and in this case more numbers need to be hammered out.
  • Maybe your home represents a large portion of your overall net worth; that’s another conversation.

I’d want my advisor to think through the trade-offs without the incentive of getting paid more or less.

Whether you should take a rollover versus a pension payment 

What they (may) say…

  • A big lump sum of “x,” versus a monthly payment of “x.”
  • An advisor can make the argument that you can earn a greater return than the monthly pension amount, so you should transfer the risk to yourself, and take the lump sum out to invest it with the advisor.
    • Remember. That also gives them more assets to charge you a fee on…

What they (most likely) don’t say

  • Maybe the pension plan is in trouble, and there’s a serious issue it may go bankrupt.
    • Usually the hype lacks analysis. I’ve never heard of a peer reviewing all the pension accounting and actuarial reports of a plan.
    • Even so, if the pension has enough assets, hopefully they pay insurance premiums to the Pension Benefit Guaranty Corporation (“PBGC”).
      • We could go down the end-of-the-world trail further if PBGC is dead. Yet, what do you think is happening to your portfolio invested in the market, instead of taking the pension payment, if the world falls a part?
  • The pension is “guaranteed” (by the plan). That means, you get a check cut every month (or whatever frequency you select) for (usually) until you (and maybe your spouse) die.
    • With longevity in your family, it’s harder to pitch the we’ll earn a greater rate of return investing the lump sum.
    • Maybe you have bad health in your family.
  • Maybe you don’t have any other liquid investments. If you have an emergency need this could be an issue: sewer line, medical, family, and/or other financial surprises.

The main point is to start doing the analysis without a big conflict of interest.

What is the right level of risk in your portfolio 

What they (may) say…

  • You will most likely earn less with bonds versus stocks, so we charge a lower asset-based fee on bonds, and higher fee on stocks.
  • We sit on the same side of the table as you, because we make more when you make more.

What they (most likely) don’t say

  • There’s now an implicit incentive to take on more risk. For example, if I can earn a 1% asset-based fee on stocks, versus a 0.5% fee on bonds, what do you think I’m going to do? What pays me more?
    • It’s easier to say, ya, with interest rates increasing, and bonds having issues, you need more stocks to meet your rate of return number.
      • Well, the advisor now gets paid more too.
  • Let’s step back further…If my goal is to increase your account as much as possible, that may seem great. You’re thinking: perfect, we’re on the same side of the table. But. We. Are. Not. I might take as much risk as possible, and incur serious declines in your portfolio on the race to a higher value, and higher fee!
    • Plus, a serious decline right as you begin retirement (due to more stocks) in a race for more compensation may cook your chances of a monthly income you envisioned.
    • Your path might be a lot smoother with more bonds, but I get paid less as the account grows slower, and I get paid less for bonds…See the issue?

It’s about taking the right risk to meet your goals. It’s not about how incentives pay us more to take more risk.

Whether to buy a rental or start a business in retirement

What they (may) say…

  • Rentals are risky, with interest rates increasing, and low (historical) capitalization rates, why would you do that? You could just buy a leveraged REIT ETF; it’s the same thing, and it’s liquid.
  • Start or buy a business, why would you do that? That’s risky.

What they (most likely) don’t say


  • Yes, rentals are risky. You need emotional capital to put up with tenants, management, and repairs.
    • You also need more financial capital for repairs, and unforeseen events. It’s more hands on then a diversified low cost portfolio for sure; adding debt in retirement also adds risk.
  • Yes, as interest rates increase this puts downward pressure on the value of the building, as borrowing costs increase.
  • Yes, cap rates, historically, are low.
  • However, first and foremost, many advisors that say this own rentals! Ask them: Do you own a rental? I do.
    • There’s benefits too:
      • Forced appreciation, with tenants paying the mortgage as long as the building value stays flat, or grows modestly.
      • Depreciation lowers taxable income from the property.
      • You have a leveraged return that doesn’t have the risk of a margin call. If you owned a REIT on margin, and these securities declined significantly, you might get hit with a capital call to cough up more money.
      • Depending on your market, and where you purchase the rental (and the strategy), you have the possibility it will appreciate in value too, in addition to the cashflow.

Don’t take this as a license to go compete with Trump on buying up rentals.

High risks come from investing in one stock, asset class, or strategy. Just ask all the “millionaires” that owned “x” too many rentals in ’08, and lost everything…

Consulting or starting a business 

What they (most likely) don’t say…

  • Owning a business is risky. With more debt you could loose a lot more in the future if things go sideways. Worst case your nest egg is gone, and then some.
  • How skilled are you in the business you are starting? What’s the level of assets needed compared to your overall net worth, and income need?
    • I’ve seen clients start Cost Cutter franchises with 1/2 their net worth that never cut hair before…Now they are going back to work.
    • A little capital to get basic infrastructure in place to consult on what you love, and it’s not a huge drain on cashflow, that’s another conversation.

Let’s not forget, this advisor is preaching diversification of your assets (I hope).

Like your multiple (diversified) streams of income. Just like it’s not smart to own one stock in retirement, right?

It’s on a case-by-case and deal-by-deal basis.

Just because your advisor can’t earn fee income, doesn’t mean it’s not a good idea.


Whether to purchase a single premium immediate annuity (“SPIA”) or deferred income annuity (“DIA”)

What they (may) say…

  • It’s very easy for the fee-only crowd, and Ken Fisher (who has high asset-based fees! in my view) to demonize annuities. I did too.
  • Easy to say, you loose access to capital in an emergency, and the ability to get more income as interest rates increase.

What they (most likely) don’t say

If a “fee-only” advisor gets paid for a managed account, and nothing for an annuity, what do you think there going to be bias toward?

It all depends on your situation, but objectivity and balanced incentives are key.


Whether to delay your social security 

What they (may) say…

What they (most likely) don’t say

If you start taking money from social security as soon as possible, that’s more money that can sit in your fee-based account and earn compensation for the advisor, or revenue for their firm because you don’t need it for income.


Whether you can be charitable

What they may be thinking…

  • We aren’t going to recommend a gifting strategy or a Donor Advised Fund because that’s less assets to bill fees on…

What they (most likely) don’t say

If you need to take a larger amount of assets out of a managed account for gifting strategies, a conflict shows up.

Whether you can do a “back door” roth IRA contribution without major tax issues  

What they (may) say…

  • We should roll over your 401(k) at your current employer. This is called an “in-service” distribution; you need more options than your current plan, and you don’t meet my asset minimum unless we rollover your 401(k) into an IRA here.

What they (most likely) don’t say

  • If you do this, then, you are creating an issue with executing a back-door roth IRA contribution. Now you have a traditional IRA outstanding (assuming you didn’t have one before), and need to combine the new account for the IRA aggregation rule.

A tax-issue pops up, so the advisor can get more fee-based assets.

There are more conflicts.

This doesn’t mean “fee-only” asset-based advisors only act to enrich themselves with these decisions, it just means that they are incented to.

Do you know all the conflicts of interest on how your advisor is paid?