When is Independent Not Independent?

By Mark Folgmann

The financial service industry loves to use the word independent. Almost every advisor uses the word in all their advertising. Let’s take a closer look at what this means and why it’s so important. Webster dictionary’s definition of Independence is “Not contingent on something else for existence, operation, etc or not influence by others in opinion.” Virtually every advisor that will use the term Independent will have small print at the bottom of the advertisement that states whom they really represent and normally this is a broker-dealer or insurance company. This broker-dealer decides what products they can offer, process all their business and writes their paychecks. Without a broker-dealer the advisor can not operate. Typically these advisors want you to believe they sit on your side of the table and always act in your best interest but in reality they owe no Fiduciary Standard to you their loyalty and responsibility is to their mother-ship and their only duty to you the client is known as the Suitability Standard. In the simplest terms this means that they have done you no harm but have not necessarily done the best job possible because they are constrained by what they can do through their broker-dealer. Therefore it is my argument that they are not Independent at all because their existence relies on someone else for existence and operation.

Why is a word so important? This lack of Independence also creates many conflicts of interest driven once again by the mother-ship. They set compensation based on the negotiation completed by the broker-dealer and the product companies. Normally they have different compensation for like products which are structure to increase sales. There are also trips and conferences that are structured to drive sales and these also can create multiple conflicts of interest that may change client recommendations. Now don’t get me wrong, you will end up with many more choices from these advisors claiming to be independent but in my mind this still does not meet Webster’s definition of “Independent.” Hopefully this will give you a little more insight so that you can ask the right questions in the search for a true independent advisor