Journal of Financial Planning: April 2015
Dan Moisand, CFP®, has been a practicing financial planner since 1991. He is a principal at Moisand Fitzgerald Tamayo LLC in Melbourne, Florida, and former president of FPA and a member of the Board of Trustees of the Foundation for Financial Planning.
Bob met with a client last year to sign some paperwork. The client is now the owner of a fixed annuity, a whole life insurance policy, a long-term care insurance policy, and an immediate annuity. The annuity payments will be used to pay the premiums on the LTC and whole life policies.
Ben met with a client last year to sign some paperwork. The client now owns a variable annuity and a real estate investment trust that Ben likes because it is “not available to the general public.”
Bud met with a client last year to sign some paperwork. The client now has an action plan that Bud will help the client complete. It addresses the client’s retirement savings, debt management, risk management, portfolio management, tax planning, and estate goals. Those goals were developed and examined collaboratively with Bud to assure they were realistic. The client now owns a diversified portfolio that makes sense given the client’s goals. The client also bought some additional term life insurance and a long-term care policy through an independent agent who Bud has known for years.
Bob, Ben, and Bud are fake names but the descriptions are real. Although not identical, the three client situations are very similar, yet the approaches and the end results are quite different.
Readers of this publication will quickly surmise that Bob is an insurance agent. Nothing wrong with that. Just about everybody needs insurance of some sort, and I am thankful to know many professional insurance agents who do a great job of making sure clients are protected properly. Unfortunately, Bob ain’t one of those agents.
Bob’s sales practices are downright predatory. He pumps up the fear in everyone he meets and uses the guaranteed aspects of the insurance products he sells to ease the pain he fosters.
Ben has an insurance license and he is an independent contractor representative of one of the country’s top broker-dealers. Many independent broker-dealer reps think independently and don’t just buy what they think will sell. Unfortunately, Ben ain’t one of those.
Ben acts like a brown-nosing waiter. Whatever clients say they want, he will tell them that it is a great idea and will quickly put the clients in products that appear to do whatever it is the clients are seeking, even if it’s not in the clients’ best interests.
That leads us to Bud. He seems like a good guy, wearing the white hat of a fee-only financial planner. Bud is a lot of things but, sadly, he ain’t one of those.
Bud works for one of the largest financial services companies in the country. He collected a flat fee to provide “fee-only financial planning”—a phrase he uses often. Bud is actually a pretty good financial planner. It’s the implementation that is less than top notch. Bud is a “hat-switcher.” His company has been pushing for more utilization of their model mutual fund and ETF portfolio offering. Bud sells it as a customized “fee-based” solution that is more objective than an old school commission approach. The funds and ETFs are largely proprietary or partially owned by his firm.
A Difference in Standard of Care
There are more differences here than just the products placed. The standard of care that applies to Bob the insurance agent is little more than caveat emptor, let the buyer beware.
Ben tells clients that because he is “board certified” he is a fiduciary. He even has a designation with the word “fiduciary” in it. However, Ben’s actions with respect to the variable annuity and REIT are subject to a FINRA suitability standard.
Bud is a fiduciary for his planning, but the model portfolio he’s offering is a non-discretionary account that his employer insists is not an advisory account. I don’t think it is quite as simple as discretionary versus non-discretionary, but neither FINRA nor the SEC has made his firm change, so that’s how it is, I guess.
Bob, Ben, and Bud have a few things in common as well.
All three use the titles “financial adviser” and “wealth manager.” All three are CFP® certificants and use the CFP® marks on their letterhead after their names. Ben and Bud also use the spelled out CERTIFIED FINANCIAL PLANNER™ moniker in print, but Bob does not. In Florida, people licensed only as insurance agents are not supposed to use the term “financial planner.” Bob’s boss thinks that as long as he doesn’t spell it out, he isn’t “holding out.”
Although all three situations present elements of varying degrees of shadiness, there is some truth in what Bob, Ben, and Bud told clients. There are risks in the world, and insurance can provide guarantees. Non-traded REITS are not available to anyone. The client only paid a fee for the planning.
The obvious problem here is that none of the titles used tell us what these guys do. That means the public has no idea what to expect. You and I can figure it out, but the consumer cannot. Only Bud did any real financial planning yet all make known they aren’t just “financial planners,” they are “certified” by golly. Well, except for Bob. He only uses the letters out of concern he will be deemed to be holding out as a financial planner.
Hat-Switching Epidemic
The consumer protection angle on the name game is critical. There is no single license, designation, or credential with the rule of law behind it that lets a consumer know that a competent practitioner will provide actual financial planning and be subject to a fiduciary standard at all times.
Those who have earned the CFP® marks have passed competency testing, but are not required to provide any financial planning. I have no problem with the concept of a non-practicing CFP® professional when it is someone like a professor who doesn’t take on clients, but the Bobs, Bens, and Buds of the world confuse the public.
Then there is the fiduciary issue. The regulators have already blown this one. Hat-switching between an advisory role and a sales role is an epidemic.
Regulators do not seem to care what a title implies. Holding out as a “financial planner” only triggers the need to register as an investment adviser representative (IAR). It’s been that way since IA-1092 released in October 1987. I wonder if the SEC has forgotten about that. Like most “advisers” these days, Ben and Bud are IARs for their firms.
Regardless, like working with a CFP® professional, working with an IAR doesn’t assure any financial planning actually occurs. At least the CFP® marks assure basic planning competency has been tested. Virtually nothing is required of the many other titles used.
The Canadians had a bold idea in 2001 when they released the proposal that would make it illegal to hold out as providing financial planning without proper registration. In Multilateral Instrument 33-107, they describe “holding out” in part as using a title that includes any of the words: financial, retirement, wealth, security, asset, or money in combination with any of the words: adviser, advisor, consultant, specialist, expert, manager, or counselor, or a title similar to “financial planner.”
That would sure do the trick but alas, it never passed.
I don’t expect our regulators to be this thorough. Separate regulation of financial planning would help, but that seems a ways off. It is probably too much to hope for to require actual financial planning from “financial planners.”
What regulators could and should do is at least limit the use of the title “financial adviser” to people who are actually advisers rather than sales reps, attach the title to a bona fide fiduciary duty, and ban hat-switching. Give the public a clear place to go. They need a safe haven. Moreover, they deserve one.