Last Fall, my old friend Bob Veres did a rather common thing, which yielded some uncommonly interesting results. Veres asked his newsletter readers to identify the issues that “all advisors everywhere should be paying attention to.” He boiled down the results to 12 issues that were largely the usual suspects. Then he asked for
live feedback on the issues at a NAPFA meeting in November, at which, he wrote the “audience immediately locked onto one of the issues…which they clearly believed was the most important one for us to be talking about.”
The issue? “How can true professional advisors communicate the value of their services, and distinguish themselves from the competition?”
So it seems there’s another side to the fiduciary-duty-for-all-advisors debate that has been raging in Washington for the past six months or so. Many observers, myself included, have been heralding the best opportunity in 70 years to legally give all financial advisors the duty to put their clients’ interests first. But it seems that many advisors who already accept that duty aren’t so sanguine about mandating that other advisors rise to their standard.
These advisors are asking, of course, exactly the right question. It’s the right question now, just as it’s been the right question for the entire 40-year history of the financial planning movement. Unfortunately, none of financial planning’s leaders–not the CFP Board, not the FPA, not even NAPFA–has been able to provide a satisfactory answer. In my view, that’s because each has been far too limited in their scope: The Board focusing on the financial planning process; the FPA on an “open forum” for all advisors (to their credit, they did finally ask the B/Ds to leave on grounds of irreconcilable differences); and NAPFA on what seems to be a moving target–first fee-only, then competence, then fiduciary. What’s missing is a bigger, broader answer. Seems to me what’s needed in the advisory world, today more than ever, is a true profession of financial advice, what I’ll humbly suggest might be called the profession of “independent financial advisors.”
The problem here is that we’re continually focusing on the trees rather than the forest. The big picture is that we (meaning real financial advisors, financial consumers, and the country as a whole) need a genuine profession of financial advice.
I’m talking about a profession based on such clear, client-oriented, and inflexible standards that if Wall Street and other sales-oriented institutions were to adopt them, they’d be forced to give up their self-serving sales practices, and actually work for the benefit of their clients. If they didn’t, they wouldn’t be able to compete for clients with those advisors who did.
The Signs of a Profession
Sound good so far? Okay, let’s get down to more thorny issues of what such a profession of financial advice would look like. Actually, it’s not that much work at all, since most of the heavy lifting has already been done in the above-mentioned elements: all we need do is connect the dots, and add a point or two that the CFP Board has historically avoided, muttering about the “real world” and that Wall Street will claim would undermine their entire industry (and they’d both be right).
Professions historically have been created on the principle that their members acquire knowledge and abilities that are of great benefit to the public, and who take an oath to use that learning and skills to benefit the public rather than to enrich themselves. A profession of independent financial advice would be no different, establishing standards to ensure the public’s protection from similar abuses and its benefit from the knowledge and experience of financial advisors. Here are what those standards might look like:
Professional Standard Number One: I have a fiduciary duty to put the clients’ interests first. For financial advisors, that’s currently called a fiduciary duty. The key here is that it’s kept simple, and without qualifications or exemptions. These days, virtually everyone from SIFMA to the CFP Board claims to be behind a “fiduciary duty” for advisors. But then they start in with the buts: “…but not when they’re acting as sales people…but not with every client…but not if their B/D has a limited product list,” yadda, yadda, yadda. To truly be in the best interest of clients, a fiduciary duty has to be simple and clear, not with some legal escape clauses to save the advisor if things go bad. A professional financial advisor accepts a fiduciary duty for all of his or her clients, all the time. Period.
Professional Standard Number Two: I must be paid directly by the client. If an advisor isn’t being paid directly by the client, he or she isn’t working for the client. They may work on the client’s behalf or they may not, but they aren’t working for them. When you have another employer, you also have an economic incentive to represent the employer’s agenda. Look what’s happened to the medical profession since HMOs started paying the doctors: there are some pretty major conflicts of interest. Part of a professional’s fiduciary duty is to avoid conflicts of interest and this is one that can be easily avoided simply by taking compensation only, and directly, from the clients.
Professional Standard Number Three: I have no outside business affiliations. Law firms can only be owned by lawyers. Not banks, not insurance companies, only lawyers. Accounting firms are stand-alone businesses owned by CPAs. Their reasoning is clear: stand-alone professional firms avoid economic and other conflicts of interest. Once your advisory firm is owned by a bank or owns an insurance brokerage, you have a conflict. Of all the standards, this is the one that truly separates advisory professions from sales folks. We’re essentially talking about a “Glass-Steagall” for advisory firms: owned only by advisors, no outside affiliations. This eliminates commissions, proprietary products, and any other financial incentive to recommend anything other than what’s truly in the best interest of the clients. That’s what true professionals do.
Professional Standard Number Four: I have professional education and credentials. While an alphabet soup may look good on your business card, it’s easier for people to focus on one credential: MD, JD, CPA. We currently have similar education and credential standards overseen by the CFP Board. Unfortunately, their standards don’t add up to a profession. The Board will have to decide if it wants to oversee a real profession or leave that job to someone else. My guess is the Board won’t be able to abandon the potential market share offered by one million+ non-professionals. So be it. It will take more work to create new credentials, but advisors can’t have a profession without them.
Professional Standard Number Five: I am independent. If this standard sounds hauntingly similar to the NAPFA standards, you get an A for paying attention. NAPFA even had an “FO” designation back in the ’90s. But successful professions have one thing that NAPFA doesn’t have there Scarecrow: a clear public benefit. Doctors will cure you when you are sick. Lawyers will keep you out of jail. CPAs will do your taxes. We all get it. What do professional financial advisors offer? A fiduciary duty, fee compensation, a financial plan, no conflicts of interest…Yawn. People don’t get those. Worse, they believe their stockbroker offers them, too. But the one thing that no stockbroker, insurance agent, or bank trust officer can offer is independence–independence from any and all financial institutions. People will most definitely get that. Do you want an advisor who works for Wall Street or an Independent Advisor? It’s a no-brainer.
To answer the pressing question of the advisory world today, and truly differentiate professional financial advisors from all other sales people, my suggestion is to focus on being independent. Salespeople can’t do it, people will get it, and hey, it’s the right thing to do.
Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at firstname.lastname@example.org.