How to Avoid a Conflict of Interest at the Bank

how to avoid a conflict of interest at the bankWe are all faced with plenty of scenarios in life where potential conflicts of interest should make us question whether our interests are being compromised by those who are supposed to be serving us. One obvious example is a politician wrestling with truly serving his or her constituents versus taking actions that will merely win votes for the next election.

Undue Influence

Recently, a Hong Kong stockbroker exploited a classic conflict of interest in order to perpetuate a money making scheme at the expense of everyday investors. The gist of the story is that the stockbroker, Sky Cheung, was simultaneously employed as a financial columnist at a popular Hong Kong newspaper when he used his strategic positions to buy particular stocks and then write positively about them in his widely read column.

When his favorable commentary on the individual stock picks hit the press, the stock prices would responsively rise, allowing Cheung to quickly cash out on his artificially created margin. Regulators typically frown upon this use of comparative advantage, so Cheung tried to keep it under wraps by using his wife’s trading account. After finally being exposed, he was fined the amount of his profit and his brokerage license was suspended.

While manipulating markets by abusing consumer trust is definitely a devious practice, it is Cheung’s vocational position itself that raises an analogous concern for the more subtle (and less egregious) conflict of interest raised by banks and their advisors on a daily basis.

Banking on Incentives

Banks (particularly the larger ones) usually offer a range of financial services and products via employees who function as financial advisors (e.g. Wells Fargo Advisors, Regions Private Wealth Management, Chase Financial Advisors). These employees are incentivized to sign you up for their employers’ own investment offerings, regardless of whether or not they are the best deals for you, the consumer.

For example, Wells Fargo states on its website: “The combination of the portion of the Underwriting Compensation payable to WFA (Wells Fargo Advisors) and the selling concession payable directly to FAs (Wells Fargo Advisors) may incent FAs (Wells Fargo Advisors) to recommend these securities over other securities.” Such incentives are universal in the big banking world.

A given bank’s financial advisor isn’t economically incentivized to show the consumer the range of potentially better-suited account possibilities at other financial institutions, but rather to narrowly steer the consumer’s investment and earn the commission.

This conflict of interest between a bank’s bottom line (and an advisor’s pocket) and its fiduciary duty to the consumer is similar to Cheung’s story in that both he and the bank are leveraging their advisory positions to create consumer behavior that ultimately serves their own interests.

In neither situation is the consumer forced into an alley with no alternatives, to be fair (Hong Kong investors could have bought another stock just like banking consumers could choose another product), but without the fuller picture of the market that their advisor is expected to be providing them, these consumers are more likely to go along with the advisor’s recommendation.

Learning about the pay incentive structure a given bank has with its financial advisors is important before committing to any investments or services. An underlying conflict of interest could cost you large portfolio returns or basis points on interest from deposit accounts, and this could mean hundreds or thousands of dollars.

Knowing Your Options

If you feel it uncouth to directly ask a bank’s advisor how (and how much) they are being compensated, utilize Bloomberg’s Mutual Fund Screener to get a preliminary peek at how a potential investment fund with a bank’s financial advisor would stack up next to other independent funds on the market. It could reveal just how lopsided an advisor’s incentives are if you find a disparity between the value of what he or she is offering and what else is on the market.

On the banking side, don’t just settle for any savings account thrown your way for your liquid cash assets, but take a look at the spectrum of current savings account rates, CD rates, and IRA rates being offered nationwide.

These tools will help you navigate the bank-consumer conflict and put you on similar footing before making financial decisions.

Inherent conflicts of interest in the banking world make the “fee-only” financial planning movement attractive for consumers seeking an independent, uninfluenced approach to choosing particular investments. Fee-only advisors generally have no commission connection with the products they sell (which is not to say that they are conflict-free either!).

Regardless of the route you ultimately take, acknowledging conflicts of interest that are built into certain relationships will help you manage your expectations and make more informed financial decisions that could earn you some additional return.


    • DC @ Young Adult Money

      DC @ Young Adult Money 08/13/2013 5:13 a.m. #

      This is an important issue that people don't talk about enough. I know in the US regulators crack down on the practice of writing/promoting stocks you already own to "inflate" the value and proper disclosure is required.

    • Tara @ Streets Ahead Living

      Tara @ Streets Ahead Living 08/13/2013 11:48 a.m. #

      Outside of skirting taxes and fake investment schemes, there is nothing more scummy than people profiting off of insider trading!

      I see conflict of interest situations at my work all the time (like an employee getting his salary AND an additional hourly wage for doing construction work during his normal work hours) so I don't view any sort of possible conflict of interest in a positive light.

      Also, if you're too afraid to ask your investor what their fee schedule is, grow some gumption! It's your money and if they're steering you incorrectly, your livelihood in retirement is on the line. If you need help getting that information, get a friend to help out with the fee request.

    • Corina Ramos

      Corina Ramos 08/13/2013 8:09 p.m. #

      Hi Patrick,

      Nice to meet you.

      This is some interesting information you've shared with us. We don't use a bank anymore, instead we have our money saved in a credit union but I'm sure they have their own incentive programs too.

      We just have to be careful, educate ourselves, and ask questions.

      Thanks for sharing this information. Enjoy the rest of the week.

      • Patrick Russo

        Patrick Russo 08/14/2013 9:37 a.m. #

        It's a pleasure to meet you as well, Corina.

        You are correct in your assumption that credit unions also have this type of conflict of interest between members and the advisors they employ. Occasionally, credit unions will partner with a local Certified Financial Planner group and offer products and services to members through them, as opposed to directly including advisors on their payroll. You're wise to look into incentive structures regardless.

        Thanks for reading and have a great rest of the week yourself!

    • Christy Garrett @ Uplifting Famiilies

      Christy Garrett @ Uplifting Famiilies 08/13/2013 9:07 p.m. #

      This is an eye opening post. I had no clue that banks participated in this type of kick back program. I would switch to a credit union but they aren't as widely available as the bank that we currently use.

      • Patrick Russo

        Patrick Russo 08/14/2013 9:48 a.m. #

        Thanks, Christy.

        Personally, I tend to trust a bank or credit union's advisors more if they give me the whole picture up front, and especially if they are able to tell me about a better deal at another institution (or how I could search for one). That applies to loans, IRAs, deposit accounts, etc.

        If you do end up switching to a credit union, as I mentioned to Corina above, you should still be aware of the incentive structure advisors (whether employees or independent) have with the credit union before acting on a recommendation.

    • Marissa @ Thirty Six Months

      Marissa @ Thirty Six Months 08/14/2013 7:44 p.m. #

      Whoa! Some people will really do everything these days to make money even though they know they're doing the wrong thing.

    • Rita P @ Digital Spikes

      Rita P @ Digital Spikes 08/15/2013 9:34 a.m. #

      Thanks for sharing the post. It is an eyeopener, I am surprised that banks are involved in such kinds of back door program. Also I agree that one must clearly ask the advisor about their cut, there is no harm and wisely analyze what account are thrown at you and what are your needs.

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