Last week, the Dave Ramsey conflict of interest issue raised a few concerns that investors should be reminded of. First, you can’t assume an expert’s advice is always right. Second, you must know how an advisor is paid. And third, it’s important to remember that, by and large, Wall Street is a rigged game.
Ramsey gained the trust of millions of Americans with his straight forward ‘envelope budgeting’ and his disciplined debt payoff strategies. His following grew from the hundreds of local churches that he and his staff visited while hosting ‘Financial Peace’ seminars. All very commendable and no doubt an effort that helped thousands of people get on the road to financial recovery.
But his steadfast opposition to a fiduciary standard — and more importantly, his stubborn loyalty to one of the most expensive investment products available, especially to Americans of modest means — is troubling.
— Hal M. Bundrick CFP® (@HalMBundrick) February 24, 2016
And it highlights the importance of asking your financial advisor one critical question: How do you get paid?
According to a recent Gallup Poll, nursing is the most ethical and honest profession in America, achieving a very favorable rating of 85% by those surveyed. Doctors are third, behind pharmacists. Stockbrokers are near the bottom of the list, garnering a favorable honesty rating of just 13%.
The professions at the bottom of the list, with the lowest perceived ethics, include car salespeople, advertising practitioners, and Members of Congress. Lobbyists and telemarketers were least trusted with 7% and 8% ratings respectively.
The message is clear: people who are trying to sell us something are the least trusted. Those who are working in our best interests, rather than putting a profit motive above a standard of care, are seen as the most ethical and honest.
But often, people we need to trust most seem to be honest and ethical — but have hidden agendas. Unfortunately, Dave Ramsey now appears to be in that group.
[Read More: 6 Reasons to Run Screaming from a Financial Advisor]
In being advised on any important decision, we want to know that the guidance we are receiving is not being motivated by a commission, bonus or unseen incentive.
So asking a financial advisor, ‘How do you get paid?’ should be a priority. Paying a fee — defined by task or time — is nearly always preferable than paying a commission on a sale. But if a commission is involved, it should be triggered only by a sale that is in the best interest of the buyer, not the seller.
In fact, we should ask anyone offering us advice on a product or service that same question, ‘How do you get paid?’ Not only our financial advisor, but our real estate agent, banker, car salesman —
And yes, even our doctor.