Back in March, the CFP Board voted to require every CERTIFIED FINANCIAL PLANNERTM professional that provides financial planning to be held to the duty of care of a fiduciary starting October 1, 2019. I greatly applaud this move! For folks not in our industry, if an advisor is a fiduciary, then that advisor is legally and ethically required to put your best interest before their own.
Up to this point, the CFP Board separated the level of care required between planning and implementation.
In other words, when planning, the advisor must abide by the fiduciary standard, but in implementation, the advisor could abide by the suitability standard. This is significant. This means that during the implementation of your plan (when you can buy stuff), the advisor was NOT required to place your interests ahead of their own. How one might abide by one standard when planning and another when implementing is beyond me?! But given the things I’ve seen, unfortunately, there is no question that it happens.
Thankfully, the CFP Board made the decision that should have been made all along requiring that all CFPs® that engage in financial planning must do what is in the client’s best interest at all times. Here’s the problem though. I’m not sure this is going to change the industry as much as you might think. On the surface, you may think that the sale of silly products to the wrong people will change.
It probably will a little, but probably not nearly as much as we’d all hope. And this is simply because the term “best interest” is often in the eyes of the beholder.
The term “best interest” is thrown around as if it is a black and white issue, but in reality is many shades of gray. Before reading what’s below, please know that I was and am 100% in favor of a policy that requires advisors to act as a fiduciary at all times for their clients. I felt that rule was long overdue. So regardless of how this plays out, I am happy the CFP Board made the decision they did.
Best interest, whether we like it or not, is at least to a degree in the eye of the beholder. And the beholder is both the advisor and the client. Let’s look at a few examples:
A Difference in Investing Philosophy:
Just because I believe that passive investing is the best way to invest for clients doesn’t necessarily mean that I think everyone that advocates for active investing can’t possibly be working in their client’s best interest. I feel this way because it’s been statistically shown time and time again that it is behavior that matters most.
So, regardless of the fact that I can’t reconcile an argument for active investing, the fact remains that if an advisor believes in their heart that active investing is what’s best for their client and they are using those tools responsibly to keep their clients on the straight and narrow when the going gets tough in the market, then how could I accuse them of doing anything other than what’s in the best interest of their client?
A Difference in Fees:
What about fees? My firm charges an asset management fee of 1% or less depending on the client relationship. But what about the advisor charging 1.5%? Is that advisor abiding by the best interest clause? What about the guy that charges 2.25%?
When is it too much?? It’s in the eyes of the beholder. I personally think you could do a lot better, but who am I to make that call? It’s up to you, the client. If the client believes it’s too much, they can vote with their feet. If you, as the client, see enough value to pay that advisor’s fees, then what qualifies me to be the judge if it’s too much?
A Difference in Tenure:
What about the advisor that is new in the business with only a year of experience that decides to open their own RIA. I can’t possibly be convinced that most advisors practicing for a year have nearly enough knowledge to advise a client on all the things that impact that client to consistently provide advice that is in the client’s best interest. It’s likely unintentional, but if you don’t know what you don’t know, then how could you be completely confident that you are providing the advice that is truly in the best interest of the client? You can’t. Partially because they can’t know and partially because there is no such thing as unequivocal best interest.
For what it’s worth, I’m not trying to pick on newer, younger advisors as I was one myself once upon a time. And I know that our industry needs newer younger advisors. And again, I applaud the fiduciary approach and can totally relate to where they’re at in their career. I’ve met and do all I can to give new advisors mentorship or encouragement along the way, so it’s nothing against the newer advisor. It’s just that I am still consistently amazed at how dumb I was just two weeks ago. I learn things all the time that could have benefitted a client years ago. That’s the great part of our industry — the ability to continue learning.
Commissions Versus No Commissions
Can an advisor that receives any commission whatsoever act as a fiduciary? Many would say they can’t. But let’s say that you are a retirement planning client working with a fee-only advisor and you and your advisor both agree that an annuity is a good fit for your situation. Insurance companies are still playing catch up to the fee-only world and are therefore in the infant stages of introducing fee-only annuities.
As a client looking for the best solution to your retirement need, what if the best annuity for you is one that pays a commission? As the client, you probably want whatever annuity is truly the best for your situation - not the one that abides my some specific pay structure to your advisor. It’s not the commission that makes various products bad, it’s the fact that they are sold inappropriately to people that don’t need the benefits that the specific product provides so that the advisor can make a commission that makes it a bad sale. That is what makes the commission structure bad - it incentivizes the wrong behavior at times.
But out here in the real world, you’d likely hope that your advisor would recommend the product that they truly feel is best for you even if it’s a need they can’t personally fill or benefit from.
I’m Not Casting Stones
What is the right way to invest?
What is a reasonable fee anyway?
How long of a tenure should be required to have the knowledge that best interest requires?
Is it ever okay for an advisor to receive a commission?
Our industry, like it or not, is rife with these sorts of conundrums because either we don’t have a full suite of products at our disposal (this would be nearly impossible) and/or we don’t have an awareness of every single tool that exists (this is also nearly impossible.)
My point is that these are all ambiguous questions that come with ambiguous answers. This is because the subject of value and best interest are nebulous concepts even if we want them to be neatly defined.
To be very clear, I’m not casting stones at anyone! All I’m trying to get across based on the above examples is just that there is a lot of gray area with the phrase “best interest.” I may or may not agree with another advisor with regard to how they advise their clients. It doesn’t make them right or wrong or myself right or wrong. We just have different beliefs. It’s all shades of gray with room for plenty of opinions.
Best Interest is Shades of Gray
Even the CFP Board acknowledges this issue right on their website:
How can a CFP® professional be certain that a recommendation is the “best” for a client, given the enormous variety of financial strategies and products available? Does CFP Board expect CFP® professionals to investigate every conceivable option that might be available to a particular client?
CFP Board’s ethical standards have always emphasized the importance of professional judgment. The importance of a CFP® professional’s judgment is highlighted in the definition of “fiduciary” in the Standards: “One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.” CFP Board expects CFP® professionals to provide only financial planning recommendations (services and/or products) that they reasonably believe to be the best possible options available to their clients.
CFP Board acknowledges that it is impossible to review all possible options to select the best. There can be nearly infinite options when one brings together an individual’s situation and goals with the ever-increasing range of choices available to the financial services industry. For a CFP® professional who works in a setting where business or regulatory requirements limit the services or investments that can be made available to clients (captive agents, for example), CFP Board expects any financial planning services provided to be the best services and recommendations available, given the CFP® professional’s reasonable professional judgment and the limitations placed on the CFP® professional by those business or regulatory requirements. In such situations, the CFP® professional would be expected to disclose the limitations to the client, including any contractual or agency relationships that have potential to affect the client and any terms under which proprietary products may be offered.
In an area as wide-ranging and complicated as personal finance, there is, unfortunately, no way to get away from this level of ambiguity. As humans, we like to have very clear answers rather than ambiguous answers that leave room for interpretation. Unfortunately, we’re not quite there yet, but there is hope. Stay with me.
Whether we like it or not as an industry, working with one fiduciary advisor might be an entirely different experience from working with another fiduciary advisor. They may charge different fees and charge them in entirely different ways. They may manage money in entirely different ways. They may have different beliefs on insurance and so on.
I said it once, and I’ll say it again, the term fiduciary and phrase “putting the interest of my client ahead of my own” is not black and white. It is as ambiguous as saying you eat a healthy diet. Does that mean you are paleo, vegetarian, vegan, Whole 30, low-carb, or just eat “well-balanced” meals? There are hundreds of diets claiming to be the penultimate of health just as there are advisors claiming to do what is in your best interest.
The fiduciary standard was brought about because the industry all but required it. There were/are just too many shysters in our industry for the regulatory bodies to ignore it any longer. Unfortunately, the attempt to have a fiduciary standard died a slow death and I, for one, am sad that it did. Surely some requirement was better than no requirement. It doesn’t and wouldn’t solve the enforcement issue, but that’s another subject for another day.
I am, however, excited that the CFP Board has decided to pick up the baton by requiring by 2019 that every CFP work as a fiduciary for their clients in every aspect of planning. I don’t know how they intend to police that, but I am nonetheless excited that is the case. CFPs® are also a unique group. I am part of the FPA in Pittsburgh, and there is always a group of 30 or so that are at monthly meetings learning more and sharing how we can better serve clients. I am proud to be a CFP®. I’m actually of the belief that every single advisor that is providing advice to the public should be a CFP®.
And this fiduciary requirement coupled with the education and experience requirements to use the marks is going to make working with a CFP® that much more important as time goes on. Why would you want to work with anyone else?
In the End, It Comes Down to Trust.
The sticky thing about the best interest clause is that you must work with an advisor that you BELIEVE is doing what is in your absolute unequivocal best interest. This is where trust comes into play. I’ve said a million times that I’d love it if every client considered me to be the best advisor in the world, but if I had to choose I’d much rather each client say that they consider me trustworthy and feel that I care about them and their wellbeing above all else. In many cases, I’ll bet those things go hand in hand.
Being a true fiduciary and working in the best interest of your client is as much a matter of the heart of the advisor you are working with as it is a legal requirement. Doing what is in the best interest of your client can often be a meeting of the mind and the heart.
What’s gotten lost in this whole discussion is that being a true fiduciary is not necessarily a product sales versus non-product sales issue as many advisors continue to discuss ad nauseam. That said, I’ll willingly concede that I do think it’s extremely difficult to be in a sales role while maintaining the independence required to truly work in your client’s best interest, no doubt about it.
But at the same time, I’ve witnessed fee-only advisors (supposed fiduciaries working in their client’s best interest) that charge their clients over 2% per year and barely provide more than the investment portfolio. And bad portfolios at that. How could that possibly be in their client’s best interest? Is it in the client’s best interest just because they decided to be fee-only? Because the only compensation provided is by the client; is that what makes it in the client’s best interest? Is that the best qualifying factor? I sure hope not!
The reason that occurs, in my opinion, is because “being a fiduciary and working in the “best interest” of clients” has become a marketing tool rather than a way of life. It’s one reason that I know our industry is still in need of change. I am more encouraged by the day though as I can see changes afoot in our industry.
I am a part of a study group of advisors where we’re pushing ourselves to get better in every facet of the business for the sole purpose of taking better care of clients. And depending on where you live, I’d gladly refer prospective clients to each of them without an ounce of worry. Not because they are fiduciaries in the legal sense (which they are), but because I know who they are as people. Even more amazingly, my study group includes six advisors from five different firms. Twenty years ago, could you imagine six “advisors” from five different wirehouses sharing ideas on how to serve their clients better? That’s rhetorical.
Being a true fiduciary isn’t just what happens when you’re in the office or implementing your plan. I’ll say that it is far more about truly caring for your clients. It’s about committing to learning more and getting better each and every day. It’s about doing what you can to ensure your clients are making smart decisions that extend well beyond what investments or insurances you choose.
As William Bruce Cameron said in his book Informal Sociology, “Not everything that counts can be counted, and not everything that can be counted counts.”
Most of the activities that can actively demonstrate an attempt to work in your best interest as a client can’t be quantified. True financial advisors do things that have no quantifiable qualities.
- Sitting at the kitchen table with a widow after they’ve lost a spouse while calling all their utility and credit card companies taking care of small but important details.
- Helping clients fund the budget needed to renovate a house when one spouse becomes disabled.
- Giving newly retired clients the confidence to spend the money they’ve spent their whole life accumulating.
I’m more and more convinced that being a true fiduciary has everything to do with who your advisor is as a person. My wife would tell you that most nights when my boys head to bed that I spend that time working to get better at what I do for a living. It’s not because I feel obligated, but because I’m passionate about being the best advisor I can be. I’m passionate about learning. I’m passionate about my clients. I’ll bet that is a long way from what Congress unveiled when they started to talk about the best interest rule.
The hard part of all of this is that there is no way to measure the heart of your advisor. You just have to know.
What I’ve Been Reading:
Use Roth Conversions to Save Money (innovate-wealth.com) - “If we convert assets from Traditional to Roth money during this time frame, they’re able to utilize the lower tax rates of early retirement, vs the higher tax rates of later retirement (when social security and RMDs are added).”
The Economy is Good, So Why Are Stocks Falling? (meredithminutes.com) - “No one can predict the market and any guess I have would be just that, a guess, and the same odds as a coin flip. Therefore you shouldn’t value my prediction.”
Mental Warfare (mullooly.net) - “It’s not easy to listen to that fearfully insecure part of you. But, if you give it a chance I think you’ll find that it often just wants what’s best for you.”
Screenless Saturdays (theminimalists.com) - The title of this article says it all - it might be worth an experiment…If we’re trying to live a better life, this may be a good place to start.
You Can Contribute More to Your IRA for 2019 (irahelp.com) - This is the first time since 2013 that IRA contribution limits have been increased.
World GDP by Country from 1960-2017 (youtube.com) - This is a really fascinating look at how the GDPs of countries have changed over the last seven decades. It’s only a three-minute video.
Do Your Smart Devices Know Too Much? (npr.org) - This is a Ted Talk that is truly alarming and interesting. What companies are learning from us, as a result, might make you rethink these conveniences.
Fears Are Overtaking Facts in Market Sell-Off (bloomberg.com) “Investors seem to be searching for a reason to sell.”
Breaking News: Does It Exist (popula.com) - “The second problem is a stranger one: nothing is happening any faster or slower than time itself. ”
Thanks for reading!
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.