F-Word Update Spring 2018

It’s time to drop an F-Bomb: let’s talk FIDUCIARY! The big news this spring is that the Certified Financial Planner Board of Standards, Inc. has announced a change to its Code of Ethics and Standards of Conduct. Starting October 1, 2019, CFP® professionals must act in the best interest of the client at all times when providing financial advice. This is the so-called fiduciary standard, which has been in the news ever since the Department of Labor (“DOL”) created its own rule in 2016.

As a reminder, the vast majority of brokers and insurance salespeople who sell securities products are held to a lower standard of care called “suitability,” which means that what they recommend has to skulk over a low bar of what is suitable, though not necessarily in the best interest of you. That might mean paying more for a 529 plan, a mutual fund or purchasing a costly and complicated insurance product, when a simpler and cheaper one is available.

The DOL fiduciary rule would have forced financial professionals and their firms’ overseeing the nearly $3 trillion in retirement savings, to work in their clients’ best interest. But it has been in limbo since the Trump Administration decided to put it on ice, delaying (and not enforcing) it until July 2019. Although most investment companies had already made changes to their businesses to comply with the new rules, they had also mounted legal challenges, one of which found that the DOL had overreached its authority and struck it down, though the decision will be appealed.

But maybe there’s no need to wait until the Supreme Court weighs in, because the Securities and Exchange Commission is expected to propose its own fiduciary rule, perhaps as soon as the end of this quarter. The SEC version would apply to retirement and non-retirement accounts and officials there have signaled that their version would help regulate conflicts of interest and would also dictate who can and cannot call themselves a financial advisor.

The fear of course is that the SEC fiduciary standard would be a watered down version of the original idea. But that’s not why the CFP Board decided to act now. The CFP Board’s stand on fiduciary began “more than a decade ago,” according to Richard Salmen, CFP®, Chair of CFP Board’s Board of Directors. Back then, the fiduciary duty applied to those CFP® professionals who were providing financial planning services. “We are raising the bar even higher now with a fiduciary standard that will apply anytime a CFP® professional gives financial advice,” which should eliminate any confusion.

As the F-word enters another phase, here is an updated version of my Ten Questions to Ask a Financial Professional:

1) Are you held to the fiduciary standard?  Get this pledge in writing and make sure that it applies all of the time and to all accounts.

2) How will I pay for your services? The advisor should clearly state in writing how she will be paid. The three methods are: fees based on an hourly or flat rate; fees based on a percentage of your portfolio value; and commissions paid per transaction.

3) What experience do you have? Find out how long the advisor has been in practice and where and if she has any professional certifications, licenses or designations, like the CFP® certification from the Certified Financial Planner Board of StandardsCPA Personal Financial Specialists, members of the National Association of Personal Financial AdvisorsChartered Financial Analyst.

4) What services do you offer?  Some conduct financial planning alone and do not sell financial products; others may only manage assets.

5) What is your approach to financial planning and investing? Will there be a holistic plan or advice on specific areas, as needed? A potential follow up: What were the three worst investment decisions you made over the past ten years, and how did you correct them?

6) What types of clients do you typically work with? Some prefer to work with clients whose assets fall within a particular range or focus on specific areas, like retirement funding or college planning.

7) Do you have a financial interest in the entity that houses my account? When interviewing advisors not associated with large brokerage or insurance companies, ask if they use an independent, third party custodian or clearing firm (this is the entity that produces your statements), which prevents the advisor from having direct custody of your assets and adds another level of security for your account.

8) Is there anything in your regulatory record that I should know about? Conduct background checks on the professional you may hire by visiting theSECFINRA, the State Securities website NASAA and the CFP Board. While some violations are non-starters (settlement of multiple customer complaints) others may be acceptable.

9) How often will we interact? What should you expect in terms of frequency of verbal, written and in-person communication? Also ask whether the advisor will remain your primary contact.

10) ASK YOURSELF: Do I like this person? You are about to enter into an intimate relationship that will hopefully last a long time. If you have any reservations, move on. There are plenty of qualified advisors out there, who would like to help you out.