Why Your Financial Advisor May Have a Conflict of Interest...
Why Your Financial Advisor May Have a Conflict of Interest When Recommending You Sell Real Estate...
Real estate often plays a major role in building long-term wealth. Many individuals and families own rental properties, vacation homes, or other investments outside of the stock and bond markets. While a well-rounded financial plan should consider all assets—including real estate—some investors are surprised when their financial advisor recommends selling property and investing the proceeds into a managed portfolio.
At first glance, this might seem like straightforward advice. But it’s important to recognize that this recommendation can carry a potential conflict of interest.
Where the Conflict Lies
Most financial advisors are compensated based on the amount of assets they manage for clients, often referred to as assets under management (AUM). This fee structure can align the advisor’s success with the growth of your portfolio—but it can also create an incentive to bring more assets into the accounts they directly manage.
Here’s the key point:
- If you keep your real estate investments, your advisor may not earn fees on those holdings.
- If you sell the property and invest the proceeds in a portfolio managed by the advisor, their compensation increases.
This doesn’t mean your advisor’s recommendation is automatically wrong or self-serving. There may be valid reasons to consider selling real estate—such as reducing risk, simplifying your finances, improving liquidity, or eliminating property management headaches. However, it’s critical to understand that the advisor may benefit financially from the decision in a way you don’t.
Questions to Ask Your Advisor
Before making such a significant choice, ask your financial advisor:
- How do you get paid? – Understand whether their compensation increases if you move money into their management.
- What are the pros and cons of holding real estate versus selling? – Ask for a balanced analysis that includes taxes, cash flow, diversification, and legacy goals.
- What assumptions are you using? – For example, projected rental income, property appreciation, or the expected return on a portfolio.
- Have you compared the after-tax return of keeping the property with the expected return of investing elsewhere? – This helps put both options on a level playing field.
The Value of a CFP® Professional and Fee-Only Fiduciary
Not all financial advisors bring the same level of training or independence. When evaluating who you work with, look for an advisor who is both a CERTIFIED FINANCIAL PLANNER® professional and a fee-only fiduciary.
- CFP® professionals have met rigorous education, examination, experience, and ethics requirements, equipping them to look at your financial life holistically—including investments, taxes, retirement, insurance, and estate planning.
- Fee-only fiduciaries are compensated solely by their clients, not by commissions or product sales, and are legally bound to put your interests first.
Ideally, your advisor should also have hands-on understanding of real estate and its unique tax advantages. Advisors who personally own or manage rental properties often bring valuable real-world perspective that goes beyond textbook strategies. They can better weigh the benefits of cash flow, appreciation, and tax planning against the potential risks and headaches of real estate ownership.
Working with an advisor who combines fiduciary responsibility, CFP® expertise, and real estate insight helps ensure that the guidance you receive is not only objective but also practical and grounded in experience.
Striving for Objectivity in Your Plan
A strong financial plan should account for all assets—whether they are managed directly by your advisor or not. Ideally, your advisor should act as a fiduciary, obligated to put your best interests first, even when it means recommending strategies that don’t increase their compensation.
If your advisor suggests selling real estate, make sure the recommendation is supported by numbers, not just convenience. Ask for a side-by-side comparison that includes:
- - Projected cash flow from holding the property
- - Estimated taxes on a sale
- - Expected portfolio growth if proceeds are reinvested
- - Impact on your long-term goals, liquidity, and estate planning
By understanding both the potential benefits and the built-in incentives, you can make a more confident and informed decision about whether to keep or sell your real estate.
Disclaimer: This content is for informational purposes only and should not be construed as personalized financial advice. Each individual’s circumstances are unique. Before making any financial decisions, including those related to real estate or investments, consult with a qualified professional who understands your full financial picture.
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