If you’re working with a financial advisor, it’s important to be aware of the potential conflicts of interest that may affect your bottom line. I’m Mark Saverin from Winnipeg Financial Planning, and today I’ll walk you through four of the most common conflicts you should watch out for, and how to protect yourself.
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Why Conflicts of Interest Happen
Conflicts of interest arise when your goals or financial interests don’t fully align with your advisor’s. In most cases, this comes down to how your advisor is compensated. Many advisors are paid based on the value of the portfolio they manage on your behalf.
Now, there’s nothing inherently wrong with this model, in fact, it often works in your favour because your advisor has a vested interest in helping your investments grow. But it does mean you need to be mindful of situations where their financial incentive might influence the advice you receive.
Here are four examples.
1. Deciding Whether to Pay Off Debt or Invest
Imagine you come into $100,000 and ask your advisor whether you should use it to pay down debt or invest.
There’s no universal right answer, it depends on your personal situation. But here’s the conflict: if your advisor recommends investing, it increases the amount of assets they manage and, in turn, the amount they get paid.
How to protect yourself:
Work with an advisor who provides a detailed financial plan. A plan allows you to compare both scenarios side by side, what paying off debt looks like over the next 1, 10, or 20 years versus what investing could mean. With this information, you can make the choice that truly fits your long-term goals.
2. Withdrawing from RRSPs or RRIFs in Retirement
Sometimes, making additional withdrawals from your RRSP or RRIF, beyond what you need for living expenses, can help reduce the risk of a large tax bill at death. For example, it could prevent your estate from facing tax rates as high as 50%.
However, this creates a conflict. If your advisor’s compensation depends on the size of your portfolio, recommending these withdrawals works against their financial interest.
How to protect yourself:
Ensure your retirement plan models different withdrawal strategies. That way, you’ll clearly see the impact of taking additional withdrawals and can decide whether it makes sense for you.
3. Mutual Fund Commissions
If your advisor includes mutual funds in your portfolio, they may receive trailing commissions directly from the mutual fund company.
For example:
- A growth mutual fund might charge a 2.5% annual fee, with 1% of that going to your advisor.
- A more conservative fund might only pay them 0.5%.
This creates a conflict because your advisor may be incentivized to recommend more aggressive funds—whether or not that aligns with your risk tolerance.
How to protect yourself:
Consider working with an advisor who earns the same compensation regardless of the type of investment you hold. This helps ensure recommendations are based on your needs, not their paycheck.
4. Choosing a Pension Option
If you have a pension, you may face the decision of taking a monthly lifetime payment or a lump sum when you retire.
Here’s the conflict: an advisor may lean toward recommending the lump sum since it increases the assets under their management, and therefore their compensation.
How to protect yourself:
Once again, a comprehensive retirement plan is key. Your plan should model both options so you can see the long-term effects of taking monthly payments versus a lump sum.
Final Thoughts
Compensation structures can create hidden conflicts of interest, even when your advisor has the best intentions. The most effective way to protect yourself is to work with an advisor who provides a comprehensive financial plan. A plan arms you with the clarity to evaluate different scenarios and make the choices that serve your goals, not just your advisor’s.
At Trans Canada Wealth Management, we believe every Canadian deserves advice grounded in transparency and tailored to their needs. If you’d like to learn more about building a retirement plan designed around your goals, we’d be happy to help. Come visit our website and book a free call with our team.
