DEAR COLLEAGUES: Are You a Financial Advisor’s “Customer” or “Client”?

Posted on December 15, 2023 by Dr. David Edward Marcinko MBA

By Dr. David Edward Marcinko MBA CMP™

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First – a little “insider expert” background on the confusion. It exists largely because of the influence that large financial institutions (who earn revenue through the sale of financial products) have on legislators.

The Investment Advisors Act of 1940 requires that anyone giving investment advice must be acting in a fiduciary capacity. The intent was to separate the financial salespeople, who had significant conflicts of interest, from the investment advisors, who had few to none. If you know very little about financial products, would you rather be educated as the customer of a commissioned salesperson or the client of a fee-for-service advisor? Hands down, you’d want the fee-for-service advisor.

Of course, the financial institutions selling products understood this. They were able to influence the drafting of the 1940 Investment Advisors Act, to exclude “any broker or dealer whose performance of such [advisory] services is solely incidental to the conduct of his business as a broker or dealer.” So if salespeople just happen to give some financial advice that is “incidental” to the sale of a product, they and their companies are not held to the fiduciary standard. Our U.S. Congress allows financial companies to advertise as if they are fiduciaries while their sales forces are not held to a fiduciary standard.

Now, according to Rick Kahler CFP®, the same conflict arises in some professional designations, like the Certified Financial Planner® designation conferred by the CFP® Board. The designation initially certified the completion of training in financial planning. In 2008 the Board added a fiduciary requirement to the designation.

However, CFP®’s are only held to a fiduciary requirement when they are doing what the CFP® Board defines as financial planning. If a CFP® professional is giving advice to a client, the fiduciary standard applies. Yet the same professional can sell the same client an annuity with high fees and high commissions, even if the product may not be in the client’s best interest, as long as no “financial planning” is part of the transaction. The result is significant confusion for consumers.

The bottom line is this: when you look for financial advice or financial products, don’t assume the advisor is looking out for you. It’s your responsibility to find out whether any financial professional owes you a fiduciary duty.

So, I suggest you ask directly, “Am I a customer or a client?” The answer is almost always “a client,” as most financial services salespeople honestly don’t know the difference. After you explain that difference, ask them to verify their fiduciary duty in writing. That five-minute solution may have a lasting impact on your financial well-being.

Better yet, consider speaking to your fiduciary focused and fee-only Certified Medical Planner® professional colleagues at D.E. Marcinko & Associates.

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Why we cannot assume CFP® equals “Fiduciary”

Posted on November 18, 2016 by Dr. David Edward Marcinko MBA

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Rick Kahler MS CFP

By Rick Kahler MS CFP®

One of the most important ways to find competent and trustworthy investment advisers is to be sure they owe you a fiduciary duty.

This means the advisers’ legal and ethical responsibility is to act in your best interests, not their own or their employer’s.

An ongoing legal case featured in an October 31 article by Ann Marsh in the online Financial Planning magazine highlights both the importance and the difficulty of finding a fiduciary adviser. (Disclosure: I am one of several advisers quoted in the article.)

The whistleblower case against J. P. Morgan involves an adviser and former J. P. Morgan employee, Johnny Burris, who says he was fired after refusing to give in to pressure to sell some of his employer’s high-priced products that he did not believe to be in his clients’ best interest.

Importance?

Here is why this case is important to anyone looking for financial advice: many advisers at investment firms like J. P. Morgan hold the Certified Financial Planner (CFP) designation. According to the website of the CFP Board of Standards, the organization that awards the certification, CFP’s are required “to put your interests ahead of their own at all times and to provide their financial planning services as a ‘fiduciary’—acting in the best interest of their financial planning clients.”

This sounds straightforward enough. Since 2008, the CFP Board has positioned the CFP designation as an indicator that an adviser will put clients’ interest first.

Unfortunately, that isn’t quite accurate.

Here is the tricky part: Advisers who sell financial products are allowed to “wear two hats” in their interaction with consumers. Any time they are giving financial advice and acting as financial planners (as defined by the CFP Board), they are expected to act in the best interest of the client/customer.

Yet if they don’t give any financial advice other than what is ancillary to the sale (a very confusing concept) of financial products to the same client/customer, that fiduciary requirement does not apply. The consumer is apparently expected to have the exceptional discernment and knowledge to know which hat is being worn at any given time.

As a consumer, you can assume that advisers holding the CFP® designation have completed many hours of education and passed tests to assess their professional competence.

However, because of the CFP Board’s hairsplitting, you cannot assume “CFP” equals “fiduciary.”

You still have to ask two essential questions:

The first is “In this engagement with me, who are you primarily responsible to, me or your company?” An adviser employed by a brokerage house or investment bank is very likely to be held most responsible to their company and expected to sell that firm’s financial products. This sets up a conflict of interest, in that the products with the highest fees will make the most money for the firm and the adviser, while those with lower fees may well be in the best interest of the clients.

A CFP® adviser who works for an independent financial planning firm may be less likely to be pressured to sell a given line of products. They also may do enough financial planning to be required to be a fiduciary.

However, you still need to ask the second question: “How do you get paid?” Any adviser who receives income from selling financial products cannot fully represent clients as a fiduciary without first overcoming an inherent conflict of interest.

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Assessment

An adviser who doesn’t sell any products, who gives investment advice, and whose income comes solely from client fees is answerable and responsible to those clients as a fiduciary. You can trust that such a fee-only adviser will genuinely put your interests first. 

Conclusion

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Changes are Afoot at the CFP-Board of Directors

Posted on October 23, 2013 by Dr. David Edward Marcinko MBA

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Well-intentioned attempts to protect consumers backfire?

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPIntegrity. Trustworthiness.

A commitment to clients’ best interests. These are all essential qualities for any advisor you entrust with your financial affairs.

One clue to financial planners’ trustworthiness is the certifications they hold. Designations such as CFP® (Certified Financial Planner) and Chartered Financial Consultant (ChFC) require adhering to certain professional standards and codes of ethics.

The organizations that maintain these standards safeguard the integrity of their professional designations and especially the well-being of consumers who seek out their members’ services. Yet sometimes, their well-intentioned attempts to protect consumers can backfire.

New Rules

The CFP® Board recently adopted new rules meant to prevent financial planners from calling themselves “fee-only” while still receiving commissions by selling financial products through separate companies. Now, CFP®s and members of their families can no longer own an interest in financial service companies that earn commissions if they wish to brand themselves as “fee only.”

This would be good, except the Board has cast its net so wide that it is catching the dolphins along with the sharks. It defines “financial service company” too broadly, including real estate firms, mortgage companies, and property management companies. It also illogically focuses on what clients could pay and what the planner could receive, rather than what clients do pay and what the planner does receive.

Example:

I have a minority interest in and occasionally receive dividends from a real estate brokerage and a property management firm. While I do maintain a license as a real estate broker, I am not active in the business. Because I could potentially receive a commission for selling real estate and because I do receive dividends, I’ve been told by a representative of the CFP® Board that I can no longer call myself “fee only” and must advertise myself as a “fee and commission” financial planner.

This would dishonestly insinuate I sell mutual funds, life insurance, or annuities. “Fee-only,” which to consumers means I sell no financial products, is much more accurate.

Disgruntled Calls Growing

I’ve received calls from other CFP®s affected in similar ways by the new rules.

Example:

One is a young fee-only planner who does not sell any financial products or own a portion of any company that does. Yet, he recently married a woman who owns a minority interest in her family’s property casualty insurance company. She holds an insurance license but does not work in the business. Because she, a “related party,” could legally receive commissions, her husband can no longer hold himself out as a “fee-only” CFP® and must list himself as a “fee and commission” planner.

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Is the CFP-BOD, and the CFP® mark, in Jeopardy? [VOTE]

If a financial planner’s clients pay only fees and do not purchase financial products like mutual funds, insurance, and annuities from a related company, the CFP® Board needs to designate the planner as “fee only.” The same applies to planners who maintain financial services licenses (as those in Illinois must if they give insurance advice) but do not receive commissions. The CFP® Board should not consider companies that offer services unrelated to financial planning, such as selling and managing real estate or originating mortgages, as financial services companies.

I understand and fully support the CFP® Board’s intent to stop those who were abusing the brand of “fee only.” Yet the Board’s rules in their present form will only devalue the CFP® designation.

Assessment

It appears the only way I can continue to honestly advertise my practice as “fee-only” is to terminate as a CFP®. What’s most important for me is to be seen as a fiduciary planner, working with integrity in the best interest of my clients. I won’t dishonestly brand myself as a “fee and commission” planner to keep my CFP® designation.

Conclusion

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VOTE-Would You Retain a Bankrupt CFP® for Financial Advice?

Posted on January 27, 2012 by Dr. David Edward Marcinko MBA

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According to colleague and financial advisor, Mike Kitces CFP®:

As the difficult economic environment continues, bankruptcy filings in the United States continue to occur at an elevated rate.

And it appears that financial planners are having their share of bankruptcies as well … requiring the CFP Board via their disciplinary process to adjudicate whether a CFP® certificant should receive a public letter of admonition, or has his/her marks suspended or revoked. 

With a rising number of financial planner bankruptcies putting pressure on their disciplinary resources, the CFP Board has proposed a change to how it treats such bankruptcy situations. The upshot: a bankruptcy by a financial planner will no longer bar him/her from getting or keeping the CFP® marks. However, going forward, any bankruptcy by a financial planner will be publicly disclosed for the following 10 years on the CFP Board’s website.

Question: And so, as a doctor, nurse, management consultant or even another financial advisor, would you ever retain a Certified Financial Planner® who had declared bankruptcy?

VOTE AND OPINE

Assessment

Link: http://www.kitces.com/blog/archives/240-CFP-Board-Relaxes-Its-Position-On-Financial-Planner-Bankruptcies…-Sort-Of.html

Conclusion

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