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Making Sense of Conflicts of Interest

We hear a lot about conflicts of interest, usually in the context of how someone else has used their position for personal benefit as opposed to the goals of the person or entity for whom they ostensibly are working. Before condemning others, though, we should probably try to understand the nature and effects of such conflict as well as how we might address them.

First, how and when does a conflict arise? It might be said that many conflicts of interest are inherent in the relationship we examine. An executor who is also a beneficiary of an estate, a broker or insurance agent selling products to clients, a used car dealer and prospective purchasers – in each case the former has an interest that may well conflict with the latter’s best interests, even when it is one and the same person like the executor/beneficiary. One naturally wants the customer/client to purchase what is being offered, whether it is advice, products, services or almost anything else. But if the customer/client does not know how the seller benefits or is interested in the transaction and does not know what the difference is among realistic alternatives, the conflict of interest might nudge the seller towards emphasizing the positives and ignoring the negatives of the transaction from the customer/client’s standpoint. And the customer will not fully understand the motivations of the seller, perhaps believing that the seller has his or her best interests at heart when the seller clearly does not.

How might we best mitigate the conflict of interest so we can proceed? In the financial industry, broad written disclosures of potential conflicts of interest are required to be provided to customer/clients. Other business often provide disclosures to their customers. Human nature being what it is, many of them do NOT read or understand the disclosures and so they have no real impact. Verbal explanations also likely fail because people are unwilling or unable to take the time and have the knowledge to understand them and explanations always might be deficient either deliberately or accidentally. That said, education and the light of day are the best tools to address conflicts of interest. If a customer knows and understands that the seller is going to make money if the customer accepts a recommendation and that the seller is going to make even more money if the customer accepts a different recommendation, then selecting either is an informed decision and the conflict of much less importance.

We will discuss conflicts in more detail in a subsequent post – but for now, remember that conflicts are everywhere, some are more important to address than others and our best bet to handle conflict is knowledge. 

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