In this post I’d like to give a little history and background on the advice industry. It may not grab you right off as being the most compelling reading, but please stick with it. I have some valuable points to develop. In Part II I go into some of the changes in our regulatory environment.
When I was a young teen I remember going with my father to visit his stockbroker. Dad used the occasion to teach me what owning common stock means (an ownership stake in a publicly-traded company). He explained that the broker brings buyers and sellers of securities together, and facilitates trades. For this service there is a fee on each trade – a fee on both the buy and the sell, paid by the customer to the broker.
Looking back on it, Dad was explaining to me that I, the buyer, and the broker, had a conflict of interest. My interest was getting the cheapest price for the shares. The brokers interest was to execute a trade, not unlike any other salesperson working on commission – from the travel agent to the suit salesman at Bloomingdale’s. Another savvy investor I remember from those years, a family friend, told me she never permitted a broker to call her. She would only call him after having done her research and making a decision on what trades to place. Why? Again, due to the conflict of interest, she felt she’d never be able to know whether the broker’s advice was good for her, or just good for him.
Where else did people get financial advice then? Banks, largely. But the banker’s interest was in keeping the client funds on deposit, and initiating loans. (The investor with a long time horizon would have been much better off by visiting the stockbroker, and accepting market risk in exchange for a significantly higher return.)
Were those the only two choices? No – insurance agents also dealt in financial advice. Insurance is a risk management product, and a critical part of anyone’s financial planning. It does what nothing else can do – it promises to provide funds at death in exchange for a premium. The agent’s goal is, of course, to provide advice with the goal to sell a policy. Again, perhaps conflicted advice? Accountants, too, gave financial advice, but on a very limited basis.
These industries have since evolved. The stockbroker may still earn a commission on a trade, but more likely than not assesses a fee based on the amount of assets under management, which often includes all ticket charges. The insurance agent may be licensed to sell mutual funds or individual securities, and thus offer his client more comprehensive services. The bank will have tiers of service levels for its clients, which include investment management and insurance services. The accountant may work for a large firm, which offers both corporate and individual services.
The point is that once upon a time there was clear delineation of services between banks, stockbrokers, accountants, and insurance agents. Now the lines have all blurred. But the issue of potential conflict of interest still remains.
To address this issue, the Certified Financial Planner Board of Standards was established in 1985, with the goal of benefiting the public by certifying individuals who’d met rigorous education and testing standards. Those certified, CFP® professionals, adhere to a fiduciary standard of client care when giving financial advice. This means the client’s best interests come first, foremost, and always. The CFP® professional has a duty to tell the client what is in the client’s best interests, even if it results in a loss of income to the professional.
By way of example, consider a client about to retire. The client’s income options are two. First, he could take a defined benefit pension payout which would last over his and his wife’s lives. Or, he could roll the money to an IRA and take distributions from that. The CFP® professional is in the business of managing IRA assets and assess a fee to the client by way of compensation. After much due diligence, the CFP® professional sees that these clients are very conservative, and are generally in a good place financially. He therefore advises the client to choose the pension income. He has lost out on the revenue stream of the assets he might have managed. But he’s done right by the client, and given solid, non-conflicted advice.
It is an objective of both the CFP® Board of Standards and the Financial Planning Association that financial planning be regulated as a profession at the state level, much as accountants and attorneys are regulated. To give you some perspective as to our personal commitments to this objective, I was the 2016 President of the Financial Planning Association of Miami, and was the 2017 Board Chair. Jonathan Cameron was the 2018 Chapter President, and 2019 Board Chair. So we are fully committed, both in word and in deed.
To do comprehensive financial planning for a client takes a team of professionals. We see ourselves as the quarterbacks – we call the plays. We work closely with estate attorneys, accountants, and insurance professionals to complete the aspects of a client’s plan that we are not professionally able to accomplish. Over time the public will also come to see financial planning as a unique professional discipline. The CFP® marks are, and will continue to be, the gold standard for those working in the profession.
I am certainly not disparaging all the great people working in this industry who earn commissions. I do seek to point out, however, that conflicts of interest exist, and caveat emptor still applies. We at CameronDowning take our fiduciary responsibility seriously. As part of our initial client consultation – always complimentary – we identify any potential conflicts of interest. It is our practice to be transparent in all our business dealing, and all to benefit the public.
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