It looks like the FTC is going to start requiring bloggers to disclose paid endorsements. I’m not sure if or how it will apply to affiliate links, but it will be interesting to see what happens.
For those who are not experienced in the ways of blogging/online entrepreneurship: An affiliate link is simply a link to a product or service whereby the blogger receives a commission for any sales made via that link. For example, I frequently recommend TradeKing and ING Direct on this blog, and I make money if you open an account at either of those places via one of my links.
Commissions aren’t necessarily a problem.
Just because somebody receives a commission for something doesn’t necessarily mean they’re trying to deceive you. For example, I really do use TradeKing and ING, and I really am happy with them.
If I wanted to, I could recommend Scottrade instead of TradeKing and thereby earn 73% more money for each account opened. But having used both brokerage firms before, I can tell you that TradeKing is the one I’d actually recommend.
Similarly, every time I link to The Four Pillars of Investing on Amazon, I’m using an affiliate link, and I make a little over $1 when somebody buys that book. But I promise, the reason I’m linking to the book has far more to do with the quality of its information than it does with the $1 I earn if you purchase it.
What does this have to do with personal finance?
Anytime somebody suggests that you do something, it’s important to be aware of how they’re compensated so that you can make an informed decision as to whether or not to trust them. For example:
- Your real estate agent is paid a commission as a percentage of the sale price. Is he/she really looking to get you the cheapest price on the home you’re buying?
- Brokers don’t receive a commission for selling no-load index funds. Does that have anything to do with their unwillingness to recommend them?
- Dave Ramsey receives kickbacks from brokers. Does that have anything to do with why he tends to recommend broker-sold, front-loaded mutual funds?
You need to know.
The question you absolutely must know the answer to is this: How are you paid? If a business won’t tell you all of the ways they make money from you as a customer, take your money elsewhere.
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{ 5 comments… read them below or add one }
I look forward to your “FTC Compliance for Bloggers Made Simple.” Right now I’m just winging it.
Hahaha. I think we all are.
I agree with the point being made here. But I also think it is dangerous to think that you have uncovered all possible conflicts just because you have focused on the obvious financial ones.
I once worked for a newsletter where we were forbidden to allow sources to pay for our lunches. The idea was to avoid conflicts of interest in reporting and the rule of course made a certain amount of sense. But it did nothing to address the far bigger conflict problem — that we needed to have relationships with congressional aide to do our jobs and that we all felt pressure to slant our stories a certain way to avoid antagonizing our best sources. A reporter that covers taxes is going to have a hard time meeting deadline on a going forward basis once he writes a story critical of the chairman of the committee. That’s life in the big city.
The same thing applies in InvestoWorld. Scott Burns once told that the reason why the “experts” don’t tell us a lot of the realities of stock investing is that “it is information most people don’t want to hear.” Most “experts” want to get on the good side of the people who buy stocks and who buy investment guides. So they say paint stocks in a more positive light than is merited at times of high valuations. Again, that’s life in the big city.
Conflicts are everywhere. The obvious ones are not such a big deal because we are aware of those and we can adjust in our minds for any slant. It’s the conflicts we don’t think about that cause us the most trouble.
Rob
Good points Mike. I think this is something that will become a bigger issue as Web 2.0 continues to enter the mainstream and anyone can become a publisher, sharing their experiences and recommending products.
I’m in complete agreement that a conflict of interests doesn’t necessitate money changing hands.
At the same time, I think we’re well-served by following the money as it’s an easy way to uncover conflicts of interest (if not all of them).