Journal of Financial Planning: October 2018
Ian Harvey, CFP®, is a financial planner at Financial Asset Management Corp., a fee-only financial planning and wealth management firm. He serves as the 2018 FPA NexGen president and was named to the 2018 InvestmentNews 40 Under 40 list.
In September, FPA Chair Shannon Pike, CFP®, wrote an article in InvestmentNews titled “Focus on Competency, Not Compensation Method.” My initial reaction to it was one of some discontent, considering I had intentionally sought to work with a fee-only financial planning firm from the start. I was convinced that fee-only financial planning firms were the pinnacle of the profession and only fee-only firms were capable of providing truly conflict-free* advice!
Subsequently to that first career move, I have continued with intention to work for what I long considered to be the most conflict-free model available in my view—fee-only. As my experience in the profession has expanded, and the individuals with whom I have had the opportunity to discuss the future of our profession with has broadened, it is clear to me that fee-only does not equal “conflict-free,” let alone fiduciary.
The reality I have come to terms with is that no compensation model is conflict free (*hence, the asterisk). A couple of quick (and arguably well-known) examples:
Example 1: A fee-only firm that charges based on a percentage of assets under management needs to make a recommendation to a client regarding the purchase of a home. Should the client take a mortgage and keep the funds in the portfolio? As you are aware, there is the math answer (it “makes sense” to take a mortgage, given the after-tax cost) and the emotional answer (the client simply cannot handle the debt).
The potential conflict: If a client leaves the funds in the portfolio and takes a mortgage regardless of their emotional concern, the financial planning firm will benefit from higher fees going forward than if the client pays for the home in cash.
Example 2: A second example might be a margin loan used for short, bridge loan financing (for example, to finance a home renovation while you secure a HELOC). Assuming the HELOC comes through, margin may make sense here.
The potential conflict: Many of us have seen margin loans that extend into a years’ long debit against a client’s account (I will spare you the explanation of the risks associated with elongated margin loans). All the while, the fee-only firm can charge on the entirety of the assets in the portfolio.
These examples are intended to show even “the best” fee structure is not conflict-free. Unfortunately, “fee-only” is often used as a key differentiator by some using their compensation status as the ultimate litmus test as to why they are better planners than others. To be sure, “fee-only” does not equal “great adviser” or “great planner.”
As Shannon wrote in his InvestmentNews article: “Contrary to the opinion of some in the profession, compensation alone is not a fair indicator of a professional’s competency and ethical standing.”
Importance of Fiduciary
While I remain a proponent of the fee-only model of financial planning because it does reduce (not eliminate) potential conflicts, I am less convinced that it is the only way in which planners can be a fiduciary to their clients. The reality is I was sold on a phrase (fee-only) and not on a standard by which the public would know their planner is handling their life savings and financial decision-making with the utmost standard of care (fiduciary). Of course, how we are paid for our services plays a role, but the role compensation plays shouldn’t trump the importance of fiduciary financial planning.
If we were able to look into a crystal ball to see the future of our profession, my hope is that “fiduciary” will have replaced “fee-only” as the preferred, marketable f-word used to differentiate financial planners from non-planners. That is, to differentiate between planners who are recommending and implementing advice with clients’ needs first, as opposed to those who are not held to such a standard.
I must admit, not having a galvanized profession that expressly endorses fiduciary financial planners (not fee-only planners) as best for the public confounds me. I believe financial planners, specifically CFP® professionals who actually provide financial planning, are the gatekeepers to the process that allows clients to realize financial freedom. In a world where pensions are shrinking, and Social Security uncertainty persists, consumers are increasingly required to be self-reliant when it comes to their financial security.
Eliminating Confusion
In other, arguably equally perilous circumstances, consumers can turn to professionals like M.D.s, J.D.s, and CPAs for certainty. As it stands now, consumers are mostly unaware of these internal profession debates we carry on at conferences and in our offices. As such, we have not provided a clear explanation to the public regarding what financial planning is (and what it is not) and whether financial planners have to work purely in the best interests of those they serve.
Confusion persists among consumers attempting to simply find an honest, hardworking planner to navigate the ever-evolving world of personal finance. Because of this confusion, our ‘trust’ quotient with consumers limits our profession’s ability to elevate.
As a profession, expanding this ‘trust’ quotient with consumers should be our goal. To do so, we as financial planners (those holding ourselves out to be practicing financial planning as defined by CFP Board) should welcome and promote an unambiguous fiduciary standard. As a result, the question should transition from “Is your financial planner fee-only,” to “Does your financial planner operate as a fiduciary.” This will take work on the part of the profession (and those who espouse to be members of it) to change our own mindset before we can change the mindset of the public. If we can do that we can then work together as a profession to educate consumers and continue effective regulatory discussions.
The end game for financial planners should be fiduciary advice for all clients of our profession, while not forgetting the work already done by the generations who have come before us and working with those who continue their work to this day. If we can shift the driver of the public financial planning doctrine to ‘fiduciary’ rather than arguing over which compensation model is ‘right,’ we may be surprised to find the public more willing to engage financial planning professionals. Imagine the clarity!
In the words of Denzel Washington, “See you at work.”