Defining a Fee-Only Fiduciary Profession

Journal of Financial Planning: December 2013

 

Ross Levin, CFP®, is the founding principal of Accredited Investors Inc. in Edina, Minnesota. His book Implementing the Wealth Management Index, published by Bloomberg Press, is now available. Email HERE.

I’ve been thinking a lot about three terms that have been bandied about our business forever— fee-only, fiduciary, and profession. I’ve seen these words make people’s blood boil. What is it about these concepts that can cause such fits? I am a fee-only fiduciary. For me, this simply means that my clients directly pay me and I place their interests ahead of my own. It doesn’t speak at all to the quality of my work, but it does mean that I won’t act upon my conflicts of interest if they are not in the client’s best interest.

Where things get twisted in this argument is when we use these as phrases that make us holier than thou. I know a lot of people in this profession who are not fee-only, nor can they call themselves fiduciaries (typically because of corporate rules). Many of them do the type of planning for whom I would send my close friends. Also, being fee-only does not necessarily mean that clients will have lower overall costs; it simply means that clients are completely aware of what compensation we are receiving from them, because it is paid directly by them.

As a firm, we felt it was in our economic interest to be fee-only fiduciaries. I felt more comfortable working with clients in this capacity. I felt better about our business when we could call in an insurance agent to write the type of policy we felt was best for our client, even though their commissions could have been higher than our fees. This does not make me a saint; it makes me a person who has aligned the way we get compensated and how we render advice consistent with my own comfort in working with our clients. The firm’s co-founder feels the same way. Because we really believed in what we were doing, we were able to grow our business and create opportunities for many of our employees who are CFA and CFP professionals

If being fee-only wasn’t something that created a perceived marketing advantage, people would not reach for the term when they really weren’t fee-only. But a marketing advantage is not a religion. As a fee-only planner, I still have conflicts of interest. I simply have fewer than when I also received commissions in the 1980s. I believe becoming fee-only helped build my career, not cost me it.

Is Fee-Only Clear-Cut?

Fee-only seems clear-cut, but some subtleties can make it confusing. Some planners do planning for clients for a fee, but own interests in entities that receive commissions. That doesn’t seem like fee-only to me. Some planners who work for brokerage firms are compensated by their clients through assets under management. If the brokerage firm makes money from these planners and the planners receive retirement benefits or stock options, or if the brokerage firm owns the clients, that doesn’t seem like fee-only to me. If I custody our client assets at Schwab and I personally buy 100 shares of Schwab stock, I would be fee-only. Could I call myself fee-only if I owned 1 million shares of Schwab stock and sat on its board?

What It Means to Be a Fiduciary

Being a fiduciary is a bit more complicated. How you get paid does not make you a fiduciary. Putting clients’ interests first does, and there can be disagreements over what that may look like.

We had a client who was able to self-insure, so we felt that they did not need as much disability insurance as they had. We couldn’t reduce their current coverage, but we could have an agent write a new policy for the smaller amount needed. The cost of insurance on this new piece was higher per $100 of coverage, but the overall cost was dramatically lower. The client’s existing insurance agent was furious that we would consider dropping the current coverage. I don’t believe that he was upset about potentially losing renewal commissions, and he understood that we were not getting paid on the new policy. He was upset because he didn’t think we were giving good advice. In this instance, we both could have been acting as fiduciaries, we just had ­different approaches to solving a client’s problem.

Acting as a fiduciary does not mean that you treat others the way you wish to be treated. It means that you treat them the way they wish to be treated. Some of the choices we help clients make can hurt our revenues. For example, we move clients to online savings accounts because they yield higher rates than what our various custodians pay. But it is the right thing for the client.

We recently took a huge hit on a client for whom we had miscommunication regarding investing a portion of money that was originally set aside for a different purpose. As a fiduciary, we had no question about whether to or how to fix the mistake. Because that principal is a guiding light for our firm, it makes issues like this painful, yet uncomplicated. And I believe that this has helped us grow our business.

Fiduciary Is Not Right for Everyone

Not everyone wants to be a fiduciary or work with one. I was talking to someone who was telling me that his money was with a large Wall Street firm (with a substantial number of ex-partners in government) that he knew was taking advantage of him, but he felt that the firm was so smart and that they were making enough money for him that it didn’t matter. I would not be comfortable with such an arrangement, and maybe that makes it easier for me to be a fiduciary.

My wife and I recently let go of a successful real estate agent who thought he was doing us a favor by lying for us. The home we were interested in was scheduled to close, but there was no clear title on the property. The agent told the seller that we needed to move into the home, even though the truth was we had not yet sold our home. He thought lying about our situation would make the seller more motivated to clear the title. I told him that I understood what he was trying to do, but if he lied for us, he would lie to us. We walked away from the home. He was comfortable with the dishonesty because he thought that the end justified the means, but he misread us. He was doing what he would want, not what we would want.

Being a Profession Is Not Enough

Lastly, what about this term profession? Is financial planning a profession? I hope so, but I don’t need to spend any time on the debate. I wish everyone who practices financial planning would become a CFP professional. If that were the case, then financial planning clearly would be a profession. Quality financial planning requires experience, ethics, and extensive education—the keys to a profession. I know a lot of people have issues with the CFP Board, some justified and some probably not. They are light years ahead of any other entity in understanding what we do as planners.

Being a profession is not enough. Being a profession does not make us professional. My wish is to declare victory on financial planning being a profession, but to declare war on those who use the term inappropriately. Because not everyone in the profession will be professional, there has to be reasonable enforcement. I am not sure which regulatory agency is the right one to enforce what we do, but I believe that enforcement needs to be different for those who call themselves fiduciaries and those who do not. The answer is not to water down the term, it is to bifurcate the industry. It is in the economic interest of those who do not act as fiduciaries to be regulated with those who do, but it is not in the consumer’s interest. Shouldn’t the person whose future depends on the advice they receive know whether that advice is given with their interest as the primary driver?​

Topic
Practice Management