Bob Clark, editor-at-large for Investment Advisor and its former editor-in-chief, is never at a loss for words, or opinions for that matter, on the issues that concern the planning profession. Bob's weekly blog will not only provide another outlet for his creativity, but will give readers more thought-provoking wit and wisdom from someone who's seen it all.
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I got an e-mail recently from an old friend who’s a CFP and a CPA. He was lamenting the fact that most financial planners still don’t get paid directly for financial planning, and blamed those economics for what he perceives as a widespread decline in comprehensive financial planning throughout the industry. While there’s some truth in both those assertions, I see things a little differently.
In early June, an Investment Advisor reader e-mailed me a response to my June column on legacy loans. Here’s his analysis, and why, while mathematically accurate, I feel it misses the reason why these new life insurance alternatives can be beneficial for policy holders.
As you may have heard, the Securities and Exchange Commission (possibly in an effort to do something consumer-oriented of late) has proposed changes to its Regulation S-P, that is, the guidelines for RIAs and registered reps to safeguard personal information and the privacy of consumer financial information. It’s about time. The financial advisory industry has changed dramatically over the past 20 years or so: the sales mentality of B/D-employed brokers has largely been replaced (at least if you listen to the hype) by client-oriented advisors, morphing the “Who owns the client?” question into “What’s best for the client?”
As 2007 winds to a close, it seems an appropriate time to reflect back over some of the notable occurrences of the past year. One event comes to mind that I was sorry to see go largely unnoticed, or at least, not commented on: Mark Tibergien’s leaving Moss Adams to become CEO of Pershing Advisor Solutions.
I remember sitting in Mark’s general session at the FPA national conference in Seattle, where he presented the findings of the 2007 Moss Adams Financial Advisory Compensation & Staffing Study to a packed house that had to be over 2,000 attendees. His leaving Moss Adams had just been announced the day before, and was mentioned when he was introduced. Yet while his presentation was well-received as always, his audience failed to give him a standing ovation, which I felt at the time was a missed opportunity to acknowledge the tremendous contribution Mark has made to the independent advisory profession over the past 20 years or so.
It may have slipped past your radar screen, but over the past six months or so, a striking number of states and municipalities—including New York, Illinois, and California—have passed or are expected to pass laws restricting public pension funds in their jurisdictions from holding investments in global companies who do business in Sudan. And now, companies doing business in Iran are being targeted for divestiture as well. To put it bluntly, this gives me a very uneasy feeling.
I just had a chance to look at the new 2007 Moss Adams Compensation and Staffing Study of Advisory Firms for my next column (the November issue of Investment Advisor). As usual, within Moss Adams's mountain of data there are myriad themes of interest and value to financial advisors. I wrote about the danger of large firms using their financial muscle to attract the brightest and the best young financial advisor candidates out of smaller firms who will have to bear the burden of training young advisors, only to lose them when they are most valuable. But I also see signs that higher compensation for young advisors is changing practice economics for all ensemble firms.
With employee advisor compensation on the rise—lead advisor pay is up 41% in the past two years—it looks like the industry is finally correcting an old inequity. For some time, I’ve suspected that the extraordinarily high profitability of some ensemble firms resulted from underpaying non-owner advisors.
One of the things I love about the FPA national conference is that it’s a great place to catch up with old friends I haven’t seen for a while. In Seattle earlier this month, I got to spend some time with a long-time friend who is now on the CFP Board. He will remain anonymous out of fairness: it was late one night at the Sheraton bar, when we’d both had a bit to drink and it’s reasonable to assume our conversation was, or should have been, off the record. But the point of the conversation was not.
Historically, independent advisors have had a hard time bringing themselves to charge enough for financial advice. I think that’s been a large part of the attraction of loaded packaged products: The commission is set by someone else, and you get what you get.
As usual, Morris Armstrong raises a valid, and very popular, point in his response to my latest posting, which warrants some further exploration.
How can an employee of a broker/dealer [or an independent rep, for that matter] ever be a fiduciary when their income will be coming from another entity? How do you tie in the fact that [some] CFPs will be receiving commissions and yet are being called fiduciaries by the CFP Board of Standards?
These two questions strike at the heart of THE issue that has plagued financial planning since it’s inception in 1969. As much in those early days as today, many planners want to be respected as professionals, yet compensated as salespeople. The legal legerdemain for this is called “the scope of the engagement.”
Following my last blog posting, “NAPFA’s News,” I received an email asking: “You’re not a fan of NAPFA, are you?” The question gave me pause, and upon reflection, I can see why someone might think that. So I responded that for being on the vanguard of professionalism in financial planning, I’ve been a big fan of NAPFA for many, many years; but, like the Cleveland Browns, Woody Allen, and George W. Bush, they sure don’t make it easy.
Which brings me to the response to my NAPFA blog by Nigel CFP, dated July 16, who wrote in part: “What stuns me Mr. Clark, is that …the press…has spent 25 years helping to promote [NAPFA’s] flawed concept of ‘method of compensation’ over education, examination, examination(sic) and most importantly, ethics.”
About a year or so ago, I was having lunch with an attorney friend of mine with whom I often play golf. We got to talking about financial advisors and I pointed out that under the Investment Advisers Act of 1940, registered investment advisors have a fiduciary duty to their clients, but that stockbrokers are exempted from such a duty. His response was classic: “That can’t be right; you must be mistaken.” I pointed out that I’ve been covering financial advisors for nearly 25 years, and I’m rather confident that’s what the ’40 Act says. But I don’t think I ever convinced him, a well-educated, practicing attorney, that stockbrokers and other financial planners who hold themselves out as financial advisors have no such duty to put their clients’ interests ahead of their own, unless they are also RIAs.
Fast forward to a month or so ago, when a NAPFA board member brought to my attention a survey that her organization conducted during this past winter.
After reading the comments on my first two posts about “who owns advisory clients,” I have to say that you all make good points, but at the same time, you miss THE point. It’s an emotional issue, to be sure: One fraught with feelings of disloyalty, betrayal, and ingratitude. Consequently, it’s easy to react to those highly-charged feelings with knee-jerk accusations of underhandedness, client-stealing, and yes, Morris, illegality and unethical behavior. Then, once firm owners have morally rationalized their gut reactions, the next step appears clear: have new professionals sign non-solicitation or non-compete agreements so this sort of thing can never happen again.
I recently received an email from a financial planner who “felt he had to respond” to my writing about what it means to be a fiduciary. As a licensed insurance agent and registered rep, he repeated the usual rationalizations about why it’s “better for the client” to be charged a commission (while side stepping the apparently minor technicality that their “advisor” doesn’t actually work for them). And he even came up with a new one: it’s his fiduciary duty to be an agent, because no one can handle his clients’ insurance needs as well as he can. Kudos for creativity, if nothing else.
Yet, his lengthy tome (why do defenders of commissions always write gothic novels about it?) eventually got around to an interesting point (kudos to me for reading that far). To wit: A fee-only planner on a call-in radio show refused to help a widow buy Treasury bonds by saying his fee would be too high.
I’ve received quite a few e-mails over the past two weeks regarding my June column on the CFP Board. Surprisingly, to me anyway, not one of them has been in support of the Board. Most have been from long time advisors, and one or two have even been from past Board members, who revealed that contrary to the opposition of many members, market share has always been the main focus of the Board.
These e-mails have reminded me of a conversation I had with Elissa Buie a couple of years ago. I ran into the past FPA chairperson at a reception two FPA national conferences ago. That must have been about the time the Board hired Sarah Teslik as CEO, so I asked Elissa what she thought about it. Her answer has stuck with me since. “You know, Bob,” she said with her soft Virginia drawl. “Frankly, I just don’t think that much about it. I’m just not sure how important the CFP Board is to financial planning anymore.”
Last week, I raised the issue of junior advisors leaving their firm and taking some of the clients with whom they work. Because this situation is widespread (and possibly more the norm than the exception) I suggested that in the best interests of the clients, the independent advisory profession should establish guidelines for how such a transition should be made, in an orderly and responsible fashion.
I received a number of responses, but only one—Morris Armstrong—had the temerity to post his. Because he nicely captured what I believe is a widely held position on the subject, and because the issue itself warrants far more serious treatment than it’s received in the profession to date, I’d like to explore what Morris had to say in more detail.
Welcome to my new blog. It’s not that I don’t have enough to do out here in the wilds of New Mexico, but when IA editor-in-chief Jamie Green asked me to write a weekly blog about, well, anything I wanted, and to “try to be opinionated, and passionate, and use words like ‘chowderhead,’” it was an offer I couldn’t refuse. So, my plan is to write about issues that strike me as important to the profession of financial advice, and perhaps you’ll send me a response that advances the discussion.
To kick things off, an old friend called the other day to talk about a thorny issue in which his firm is involved. It seems the firm recently sued one of its former junior partners, who after many years at the firm, left and took along the clients with whom she worked. To hear him tell it, that wasn’t their main concern: It seems she also took those clients’ files with her, and under our current privacy laws, the firm is legally responsible for the confidentiality of those files, with some liability exposure should their identities be stolen before the clients could agree in writing to sign on with her new firm.
Frankly, it sounded to me that the partners were mad, and found a legal excuse to file suit. I understand the files were the property of the old firm. But if her exclusive clients in all likelihood would continue working with her, then for the welfare of the clients, wouldn’t it behoove the old firm to just give her the files to ensure a continuity of good advice? At least, that’s what I asked him. He reluctantly agreed, but fell back on the liability for those presumably unsecured files during the transition.
It occurs to me that this is far from an isolated incident. In fact, from what I’ve seen, junior advisors leaving their firms with a handful of clients has been and will continue to be the norm in the planning profession until clear career tracks become widespread. So perhaps what the profession needs is an accepted process for handing over clients that will ensure client security and the continuity of sound advice. So as a profession, advisors won’t look like wingnuts by suing each other over for doing what’s in the client’s best interest.
