Ethics Center: Sales & Marketing

Minimize Your Conflicts of Interest: Yes, Even Now!

The topic of conflict of interest induces vertigo, especially now.

On the one hand, financial professionals hear that conflicts of interest are bad. Their industry ethics codes urge them to put their clients’ interests ahead of their own. Yet for decades, product manufacturers have also given advisors the option to sell more expensive products in order to earn higher payouts compared to products that offer essentially the same benefits at a lower cost.

Even regulatory practices have varied by license type. The Securities and Exchange Commission (SEC) and state regulators held investment advisors to the so-called fiduciary standard, while the Financial Industry Regulatory Authority (FINRA) and state insurance departments held securities- and insurance-licensed professionals to a suitability standard. Under the former, advisors were expected to avoid the self-dealing that led consumers to purchase higher-cost products. Under the latter, recommending more costly products was acceptable as long as they were generally suitable for the client’s personal situation and risk appetite.

Then last year, the U.S. Department of Labor promulgated a regulation designed to remove conflicts in the sale of tax-qualified insurance and investment products. Approved last year and poised to go “live” in April of 2017, the so-called Fiduciary Rule began to have a widespread impact on financial-product designs, especially with annuities. The goal: to reduce the gap between higher-comp and lower-comp contracts in order to prevent violation of the rule’s best-interests standard.

The new Fiduciary Rule sparked deep controversy on many grounds, especially among producers in the IRA rollover market, who believed they would have fewer product options to offer their clients and less incentive to serve middle- and lower-income individuals.

Then came the 2016 presidential election and the victory of Donald Trump. Now, the new administration has announced a review of the DOL Fiduciary Rule, which will presumably take us back full circle. Dizzy yet? We’re not surprised. But the key issue is what will happen going forward and how should advisors react.  Clearly, until one hears otherwise from government, it’s important to move ahead with full compliance. That way, in the unlikely event the rule is implemented largely or partially intact, they won’t be caught flat-footed.

From an ethical perspective, they might wonder if engaging in conflict-laden behavior will return to favor. Our response: Despite the mixed messages from government and regulators, avoiding conflicts of interests still matters a great deal. Here’s why:

  • Conflicts corrode trust. If prospects think you are recommending a product simply to make more money, they will lose faith in your objectivity. This will reduce your odds of closing the deal.

  • In the sales process, a doubting prospect will cost you time and money. They will raise more objections, do more advisor vetting, seek more input from friends and family, and do more Internet research. This means the sales process will take much longer than it normally would, thereby negatively affecting your compensation.

  • Clients who overcome their doubts may eventually buy from an advisor. But they’ll carry a seed of doubt with them. Under the right conditions—a bad investment market, a broken advisor promise, a bungled service request—lingering doubt can germinate into a consumer complaint, lawsuit, and full-blown E&O insurance claim. Financial advisors who wish to minimize the odds of getting sued should avoid conflicts of interests, period.
  • From a public-policy perspective, advisors who sell high-cost products erode their clients’ ability to grow a sufficient retirement nest egg. This is where the whole conflict issue becomes most stark. If you feather your own nest, you literally are stealing from your clients’ nests. Decades from now when they run out of retirement money, their fall to the hard ground below will be on you.

  • Conflicts relating to working on a side venture can also breed E&O claims. If your outside interests distract you from your core client duties, you might make a mistake or overlook something that hurts a client financially. Even skimping on your continuing-education reading might lead you to recommend a product or a strategy that is unsuitable or risky.

In short, letting your conflicts get the better of you typically means your clients will be worse off. That will nearly always be a potential lawsuit—and E&O insurance claim—in the making.

So despite everything you read about the shelving of the new DOL Fiduciary Rule, don’t assume that conflicts of interest no longer matter.  They do. And if you adopt ethical business practices designed to minimize them, you will close sales faster, retain clients longer, and have a much more successful financial-services career for years to come. Good luck!

For information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.