Opinions Investor's Corner Financial advice in the Wild West
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Investor’s Corner
By John Gudritz CFA
Principal
Front Street Investment Management LLC
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Most consumers are flying blind when it comes to finding financial advice. To explain, imagine the following descriptions of three financial firms you’ve recently considered hiring. See if you can spot the differences.
The first firm markets itself as providing financial planning with an emphasis on income protection strategies for retirees. After attending a free dinner and seminar on how to avoid taxes in your retirement accounts, you mentioned to the lecturer that you’re wary of commissioned salespeople. He reassured you by saying his firm will happily handle your investments on a fee basis.
However, he further offered to analyze your overall setup including your insurance needs and estate planning strategies. He referred to himself as a financial advisor and the name of his firm is Smooth Avenue Financial Advisors. He further stated that his firm has a combined 90 years of experience and the initials CLU, ChFC appeared after his name.
The second firm you interviewed provides retirement and wealth management services and their brochure says they too offer a fee-based service. They appear to be a part of a national brokerage firm but their business card has Water View Wealth Management Group printed on top. This group offers a large assortment of financial services, such as managed accounts, mutual funds, mortgage and banking services as well as insurance products.
The person you would be working with referred to himself as a financial consultant who holds a designation in retirement planning for seniors. All these credentials are starting to get a little confusing.
The final firm you met with also provides investment and overall financial planning advice. They say they mainly work with retirees or those nearing retirement. Like the others, they state that their firm, Third Way Investment Management, is independent and local.
They mentioned being a registered investment advisory firm and they made a point of highlighting that they act as a fiduciary to their clients. They also focused heavily on the benefits of being a fee-only firm. This professional further explained that he holds a respected designation. Possibly the initials were CFP or CFA or maybe he was a CPA. At this point, these designations all sounded alike so you tend to ignore them.
So, are there fundamental differences with these three firms? Yes, and here’s why.
First, consumers should know there is a serious difference between advice-giving professionals who exclusively work for registered investment advisory firms and those that also work as licensed stockbrokers or insurance agents.
Increasingly, stockbroker teams from national brokerage firms are leaving to form dually-registered investment advisory firms. They are dually-registered as both a financial advice provider as well as a sales agent. These types of professionals seamlessly swap their financial planner and investment advisor hat for their mutual fund/annuity/insurance salesman hat.
Unfortunately, with consumers believing they’re getting unbiased advice, they rarely ever see the mid-sentence wardrobe change. For that simple reason, I don’t think this is a good way for professionals to operate.
Next, consumers should know the big difference between the words fee-only and fee-based compensation.
Being a fee-only firm means they simply won’t accept commissions or sell any financial products to their clients. They only accept compensation directly from the clients they serve.
On the other hand, being fee-based means they sometimes get paid by somebody other than their client. They sometimes receive money from outside financial products companies in the form of up-front commissions or ongoing trailer commissions. In my opinion, this arrangement opens them up for potential conflicts of interest. For this reason, fee-only and fee-based are very different animals.
Finally, only one firm above highlighted that they must legally apply a fiduciary standard of care when working with clients.
Applying a fiduciary standard of care means the professional has the obligation to always put their clients’ interests ahead of their own. This is a huge item I’ve written about in the past.
Predictably, the brokerage and insurance lobbies are still fighting tooth and nail against requiring that their registered agents adopt this fiduciary standard. It appears these groups think that presenting fine-print disclosures or forcing them to start waving their hands wildly as they switch hats offers enough protection for unsuspecting consumers.
I strongly disagree and hope policymakers see the value of imposing a true fiduciary standard on all professionals who market themselves as financial advice providers.
It is truer than not that the financial advice industry tends to match “highly informed” professionals with “woefully uninformed” consumers. Asymmetric relationships like this create a dangerous brew.
To protect the public, the financial advice industry’s regulators should work hard to clear up the obvious ambiguities in the marketing messages out there.
Consumers deserve more than having to navigate through an industry that continues to operate like the Wild West.