March 27, 2019 in Invested In Transparency | by Scott Wood

Transactional vs. Transformational Relationships With Your Financial Advisor

Nightmare stories about unethical financial advisors taking advantage of clients certainly make for attention-grabbing headlines, but those examples are not a true depiction of the overall ethics in the financial services industry.


In reality, unethical advisors are few and far between, and while investors need to be cautious of bad actors, there’s a more widespread issue in the industry that has broader negative implications for clients’ portfolios and their overall experience: Transactional relationships.

This may sound harmless, but it’s a significant concern - and one that investors are largely unaware of. While there has been progress to reduce conflicts of interest in financial services, the conflicts inherent to the original structure of the industry still exist - and they are difficult to eliminate entirely. Clients need to understand what these conflicts are, and the problems they present, so they can avoid transactional relationships and instead seek an advisor who offers a transformational relationship.

Transactional Relationships

The transactional relationship is a byproduct of the original industry structure. The financial services marketplace was created to facilitate the buying and selling of securities, and advisors have historically been the “middlemen” used to move products to and from the investing public.

For advisors in a typical Wall Street/brokerage environment, investment products offer them varying levels of commissions/revenue. Naturally, this creates an unbalanced motivation for product promotion; the advisor is driven to sell what pays him/her the most, regardless of whether it’s truly in the client’s best interest. Some of these may be good investments, which makes the transactions easier to justify, but a fiduciary will always seek out what is best for the client. Period. How a particular product could benefit the advisor should never factor into the equation.

Financial incentives are an effective way to drive behavior, so it’s important to identify the advisor’s compensation structure upfront and how the firm motivates its employees. As an example: If an advisor sells a mutual fund with an up-front commission of 4.5% (usually accompanied by a penalty for early withdrawal) it’s painful for that advisor to transition to a fee-only model that pays them a 1% annual fee for giving advice. While their compensation would be more stable in the long-run under a fee-only model, the short-term financial sacrifice is often too great for them. A fee-only structure also requires the advisor to add ongoing value for the client, which necessitates a long-term commitment to the relationship and to deliver great client service.

The Transformational Relationship Difference

To get the most out of the advisor/client relationship, it needs to be primarily transformational in nature.

Whereas transactional relationships center on product and profits, a transformational relationship is product agnostic and the advisor’s primary consideration is understanding their clients’ needs and helping them reach their long-term goals. In transformational relationships, the advisor is paid to provide counsel to the client on all things related to their financial life, and their compensation is not impacted in any way by the products they recommend.

How True North Fosters Transformational Relationships

True North’s mission is to help people live fulfilled lives. We were founded in 2000 on a fee-only service model and we were busy creating transformational relationships before it was trending. Our focus is discovering as much as we can about each client from the very first conversation, so we can advise them well.

We never start with product, because how can we recommend the best solution for you until we know what your long-term goals and objectives are? We walk individuals through a proven ‘Three-Sixty Process’ which uncovers the critical information needed to offer the best wealth management advice for their situation. Through our Three-Sixty Process, we bring trust, simplicity and personalization to our wealth management recommendations.

We do not receive any compensation from investment products, or kickbacks from money managers. Our revenue is solely based on a fee for service. That’s a win-win, and we believe it should work that way everywhere.

By prioritizing transformational relationships with our clients and committing to a firm structure that eliminates conflicts, we have a vested interest in each client’s long-term success. 

Filed Under: Invested In Transparency

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