How conflicted are professional financial planners?

Appreciating the psychological factors that lie behind conflicts of interest.


When asked, financial planners believe they are objective and impartial during the advice-giving process and are seldom aware of how frequently their self-interests conflict with acting in the best interests of their clients.

However, literature and research on the psychology of conflicts of interest (COIs) highlight that we are regularly conflicted in our daily activities and our brains need to work hard to avoid conflicts that may negatively impact on the interests of others. Most financial planners tend to think of COIs in terms of the disclosure requirements found in the FAIS General Code of Conduct and the FPI Code of Ethics and Professional Standards.

However, many planners do not fully appreciate the underlying psychological factors behind COIs that are often subtle but hugely influential on their attitude and decision-making, as well as the awareness necessary to minimise the negative effects of giving clients biased advice.

COIs fall within the realm of moral standards and decision-making and are loosely defined as a clash between the proper exercise of professional judgement and personal (often material) interests. As financial products and advice are intangible and due to the asymmetry in the client-planner relationship, clients must trust that the advice they are receiving is unconflicted and in their best interests. Although there are manageable conflicts present in the relationship, they are lower-tier conflicts that do not impair professional judgement. They arise regularly and merely require a refocus of attention and effort to overcome and maintain sound professional judgement.

Therefore, a conflict only becomes unethical when it negatively influences the professional judgement of a financial planner and damages the interests of a client.

Although our rational, thinking brains believe that our professional judgement is always unbiased, conflicts are an inherent part of any profession and all professionals are influenced by subtle psychological factors. Decision-making, when conflicts are present, is subconscious and is based on both emotion and cognition (the ability to think). Although we think our decisions are made based on rational thinking, the reality is that our emotions often distort our judgement. We are genetically primed to put our interests (and those of people closest to us) before the interests of others – this is known as our self-serving bias and is usually based on our emotions.

A conflict only becomes unethical when it negatively influences the professional judgement of a financial planner and damages the interests of a client.

To avoid the influence of this bias, we need to use our rational, thinking brain; however, this takes thinking work and energy. Without conscious awareness of this bias or a tendency towards it, planners can easily fall prey to the unconscious influence of a COI without realising it.

To manage their self-serving bias, a planner will rationalise their conduct. When making a compromised decision, they construct self-serving explanations for their actions, insisting they are doing their job, or that the product they recommended is in the client’s best interests (subtly ignoring the commission or fees received) or that they acted under their professional obligations. It can be challenging for a planner to be objective and to take responsibility regarding the influence of a conflict. The opposite is true: they find it easy to persuade their brains that they acted in their client’s best interests even when the evidence is stacked against them.

Lee Rossini CFP®, Co-Author, SA Financial Planning Handbook

This form of self-deception is not a matter of lying to oneself; it consists of the unexamined acceptance of a belief that is dubious to an objective outsider. Another psychological factor
that may be present in COI situations is ethical fading. This occurs when moral issues are pushed into the background or even removed from the decision-making process and business or personal issues are pushed to the fore, for example, when faced with the pressure to meet business targets or pay bills.

Unfortunately, the self-regulatory mechanisms that govern moral standards do not operate unless they are activated, and hence a planner may not view a COI as a moral dilemma. Many psychological processes are used to selectively disengage from moral self-sanction in a process known as moral disengagement. This is not a sudden process as it creeps up on the person and gradually erodes any self-imposed sanctions. Moral disengagement includes planners minimising, distorting and denying the harm that flows from being influenced by a conflict.

Clients are dehumanised and blamed for making the wrong financial decisions while planners justify the conflict and obscure their accountability. Currently, disclosure is used to manage COIs and in a perfect world filled with rational people, it would be an effective remedy. However, research shows that disclosure can have the opposite effect. The rationale is that if a conflict is disclosed to a client, they should consider it when making their financial decisions. However, even if the potential conflict is pointed out or disclosed, clients do not necessarily discount the conflicting advice as they are willing to overlook it based on the trust they have in their planner. Furthermore, planners may give even more biased advice because they have disclosed the conflict to their client.

Decision-making, when conflicts are present, is subconscious and is based on both emotion and cognition (the ability to think).

In summary, COIs are not only associated with intentionally self-interested financial planners but also with well-meaning professionals who succumb to the unintentional psychological factors at play.

Due to the complexities in the financial services environment, conflicts are on the increase and they cannot be avoided. To ensure they do not damage their relationships with clients, planners should be aware of the subconscious factors underpinning COIs, and that they need to
be managed appropriately.

Clients rely on their planners for unbiased advice that is in their best interests. Therefore, taking on the mantle of being a professional includes making moral, independent, objective and impartial decisions that transcend all self-interest.

Sah, J. Conflicts of Interest and Disclosure, Research Paper, Cornell University [2018]. Commissioned by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Bearden, FC. The Subtle Influence: Conflicts of Interest in Financial Planning. iUniverse Inc. [2010].