Beware of conflict of interest when seeking a referral


Don't underestimate how potential conflicts of interest can hurt you when you're dealing with professionals in the world of finance.

It is common to turn to your accountant or attorney when it comes time to find a financial adviser. Your lawyer or accountant comes into contact with financial advisers as a matter of course, and many readily recommend them to friends, family and clients.

Before going with an adviser referred to you this way, take some precautions.

First, ask about "due diligence," a legal concept that defines the level of judgment, care, prudence and activity a person would reasonably be expected to exercise under particular circumstances.

At a minimum, you want to know that the referrer has checked the financial adviser's complaint and litigation record.

Second, ask whether your lawyer or accountant is getting paid for making the referral. A reader recently wrote to me about a referral fee arrangement of more than a half of 1 percent per year. That meant her accountant would be getting a payment of $15,000 on her $3 million account each and every year.

Third, if you receive a written disclosure statement setting out the amount of the fee, don't assume it is safe to move ahead.

The same reader signed such a statement, concluding that there was no harm because the referral fee wasn't coming out of her pocket. She didn't realize that she was paying the fee indirectly.

Disclosed referral-fee arrangements may seem innocuous, but they are fundamentally unsound. In my mind, all referral-fee arrangements create inherent conflicts of interest. You never know where the referrer's allegiance lies if a problem arises.

To illustrate, here's more about my reader's situation:

The woman, in her 50s, had been widowed a short time when she went to her accountant for advice. She knew nothing about investing. Her husband of 30 years had been a corporate executive who moved around a good deal and had no pension.

She desperately needed someone to take care of her finances. Her accountant told her not to worry, that he had the perfect financial adviser for her.

She followed his advice, but problems developed when some trades were not executed properly and she sought resolution through the brokerage firm.

The matter escalated into an arbitration action. When called to testify on the widow's behalf, the accountant refused, claiming a conflict of interest. His allegiance was with the broker, who was a source of substantial income from referral fees.

Before you take advice, find out whether the referrer has a financial interest in making the recommendation. If he does, go to someone else.

Attorney Julie Jason is a money manager and retirement finance author who writes for The Advocate, a Tribune Publishing newspaper in Stamford, Conn.

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad