Financial Planning by Suitably Best Interested Fiduciaries

There is a constant hem and haw to the discussion around financial planning, largely derived from the various interests of the firms that offer it and discontent about how “those other guys” do it wrong. You know the ones. Yet, against a backdrop in which being a CERTIFIED FINANCIAL PLANNER™ is compensation-neutral, a constant argument and debate is about how financial planners get paid. I’ll pause here to say: I’m not going to talk about that today. My base perspective as a person who researches financial planning compensation is that just about every model of compensation is fine so long as it’s done ethically, transparently, and is offered only in cases where it is the right fit for a client. People might die on a hill over one model or another, but I don’t care to die on a soapbox for that issue today. So with that aside, what we’re talking about today is the issue with standards of conduct: the legal and ethical requirements of those who offer financial planning services to others, or at least claim to.

The Basics

Financial planning is not really regulated as financial planning. Rather, for many decades and going back to 2015 the last time it was formally researched by the government, financial planning has mostly lived under the purview of state insurance regulators, federal securities regulators, and some self-regulatory organizations, and in a smaller form, under banking regulation through trust departments. This starts everyone both in and outside of financial planning from a point of confusion: What is financial planning? When looked at through the regulatory frameworks that claim to control it, to the insurance regulators, financial planning looks like an incredibly overdone sales pitch. You’re “doing financial planning” in order to close on the sale of a life insurance policy or an annuity product. In this lens, despite the fact that the first year of a comprehensive financial planning engagement can take upward of thirty hours on average, and that it may cover a variety of topics that have nothing to do with insurance. From the perspective of securities regulators, it’s viewed much the same: as part of the sale and brokerage of an investment product or investment trading, or as a small addition to the very important and serious business of investment management. In comments to the governmental affairs office in 2015, both regulators of securities and insurance bent over backward to declare that the interests of the other were irrelevant in light of the very important role they played in protecting consumers from bad salespeople. Never mind all the things in finance that have nothing to do with insurance or investment. Of course, the banking regulators took an interesting tact: Financial planning doesn’t really exist, it’s all just part of managing trusts for the ultra-wealthy; nothing to see here.

As a result of this bizarre dispersion of financial planning regulations, someone whose business revolves around selling life insurance can call themselves a financial planner, someone whose company does nothing but manage investment portfolios can call themselves a financial planner, and a trust officer whose bank only permits them to put client money in CDs and money market accounts, too, can call themselves a financial planner. A financial planner who says: “But I don’t want to do any of that!” still must ultimately choose a home within this regulatory framework, and be subject to its rules or lack thereof. Herein, we get to the legal and ethical standards.

Suitability

Suitability is essentially a term that comes down to “it must be appropriate.” An easy analogy for this might be that if you go to the chicken wing shop, they can’t start selling you burgers. This system of regulation is simple and even makes sense on its face when product providers openly state that it’s what they do. No one is surprised when you walk into an XYZ Insurance office that they are going to sell you XYZ Insurance. However, this suitability rule applies to all insurance agents and insurance product sales, and things quickly grow murky when someone under this regulatory framework starts using other terms to describe themselves: “Wealth manager, certified advisor, retirement income specialist” and so on.

To torture our chicken wing shop analogy, imagine you’re invited to the finest restaurant in town. They say they offer everything from Kobe Beef to Dom Perignon. Yet, when you sit down you find there are no menus, but instead a very enthusiastic, charming, and charismatic waiter who excitedly informs you that they have a special today: Chicken wings. You might be excited to eat chicken wings or perhaps you’re a bit perplexed; is that really what the best place in town is selling? If you communicate to the waiter that you want something other than chicken wings, not to worry! “We have a wide selection of bespoke and personally prepared options for you. Sandwiches, burgers, salads, whatever your heart desires!” Yet, when your order comes to you, you may be surprised to see that it’s a chicken wing salad, a chicken wing sandwich, and so on. The other ingredients might add flavor or character to the dish, but ultimately, the finest restaurant in town (or so it claims) is still just a chicken wing shop.

Under a suitability framework, the seller of insurance products ultimately has only one responsibility: To sell you an insurance product that meets your needs. Not the best insurance product, the cheapest insurance product, or even the right insurance product for you. Just one that meets your needs. Soup of the day? Chicken wings, enjoy.

Best Interest

A response arose to the issues with suitability in the past few years, the SEC’s “Regulation Best Interest” or “Reg BI.” Simply put, this attempted to find a middle ground between suitability and fiduciary, by requiring that firms apply the best interest requirement to the recommendations of securities products that they sell. The result? The SEC has cracked down on a number of brokers who, frankly, were violating even the more basic suitability rule. While it has touted these crackdowns as demonstrations of the value of the Reg BI framework, the framework comes with a glaring flaw: Best interest gets to be defined by the constraints of the firm, not the person giving the advice. So, if a firm says to its employees: “You have three options, you can only use these three options, no other options are permitted for use.” Then an employee of that firm satisfies the Reg BI requirements by recommending one of those three options, so long as that option bore some semblance of reality to the idea that it was in the client’s best interest. It again does not need to be the best product, cheapest product, or even remotely comparable to other options on the open market. It just has to be “the best we can offer.” And this is of course only pertaining to the sale of investment products or the recommendation to engage in investment management services when offered. If the same securities broker offers you a life insurance policy, we’re back to suitability rules. So, with that in mind, let’s talk about the soup of the day. Are you disappointed in chicken wing soup? Not to worry, it’s the finest chicken wing soup we offer.

Fiduciary

As the t-shirt from XY Planning Network puts it: “We’re big fans of the F Word (Fiduciary)”. Fiduciary is a concept with a long legal history and actual teeth to it. At its base level, fiduciaries must act with a duty of loyalty and a duty of care to their clients. None of this hogwash about suitability or “the best of a bad option” applies here. While fiduciaries can have reasonable disagreements about what is in a client’s best interest, there are serious legal teeth and enforcement mechanisms behind violations of fiduciary duty. Yet, some of the same legal issues can crop up when someone has varying levels of conduct. For example, at MY Wealth Planners®, our regulatory flag is planted under the SEC’s “Registered Investment Adviser” term, which extends down to the state level, and ultimately requires us to act as fiduciaries when providing services under that regulatory framework. We are not insurance agents or securities brokers, meaning that we don’t even have the option to offer services under a “suitability” or “best interest” standard. This differs from someone whose licenses permit them to offer many different tiers of service, ranging between suitability to fiduciary with regulation best interest somewhere in between. To tease out our analogy one more time, this reflects a world in which there are three restaurants: One will make you what you ask, one will make you what you ask but only within the limits of what they have to offer, and one is just a chicken wing shop. How these three restaurants are advertised and marketed might differ wildly from that simple descriptive analogy, and which one you might want to eat at and pay for might highly depend on your needs, but we can all agree that the place called “Longmont’s Finest Seafood” should not exclusively offer chicken wings.

How Can you Tell the Difference?

Unfortunately, as highlighted by the earlier description of fragmented and irregular regulation, financial planning can be tough to understand on the outside. There are a number of great question sets you can ask: I’m personally a fan of NAPFA’s, but for your perusal, here are some options:

NAPFA Questions to Ask Your Financial Advisor

Jason Zweig’s 19 Questions to ask a Financial Advisor

CFP Board’s 10 Questions to Ask Your Financial Advisor

When in doubt, do not accept verbal confirmation that your advisor is a fiduciary. Ask for that in writing, preferably in a digital format from their email so you have a record. Save a copy of that email for later. If they state that they are fiduciaries at all times, then they should provide you with a written service agreement that confirms that requirement. If they disclose that they are not a fiduciary at all times, that can be okay, but you should ask for a system or mechanism in writing that clearly delineates when they will be legally bound (not ethically bound) as a fiduciary, and when they will be free to make suitable or best interest recommendations. In those contexts, you should ask this question every single time and demand an answer to it in writing: “If I agree to do this thing, will you be paid and if so, how much?” and follow it up with the same question for their firm: “If I agree to do this thing, will your firm receive additional money from third parties or is this a proprietary product? If so, how much?” This can seem tedious, but outcomes in finance can suffer from death by a thousand cuts, and knowing exactly the value and costs of a proposed solution is critical to achieving the financial outcome you’re hoping a financial planner can help you with.