Did you know that anyone can call themselves a financial planner? Did you know that all “financial planners” aren’t required to always act in your best interest? Did you know that some financial services professionals are incentivized to not do what’s best for you? Those who do things the right way in the financial planning industry can receive a bad rap because of those who act unscrupulously and don’t treat clients how they should. However, there are many who ALWAYS put their clients’ best interests first.
Fiduciary
A fiduciary is someone who is required to ALWAYS act in their client’s best interest. CERTIFIED FINANCIAL PLANNER™ professionals are required to act as fiduciaries to their clients. However, the CFP Board has made it easy on those in the financial product sales industry by not always requiring them to follow a fiduciary standard. So, how do you know if your financial planner will ALWAYS act as a fiduciary to you? Ask them. They’re required to tell you if there are times that they won’t be acting as a fiduciary for you.
There’s a significant difference between a financial planner and a financial salesperson. Just because someone calls themselves a financial planner doesn’t mean that they’re truly acting in your best interest, or that they even do any real financial planning. Fortunately, the National Association of Personal Financial Advisors (NAPFA) is an organization that only allows fee-only CERTIFIED FINANCIAL PLANNER™ professionals to join their organization. Working with a fee-only financial planner can provide the peace of mind of knowing that they are working for you rather than working for a commission.
Fiduciary Standard Vs Suitability Standard
Most of the financial services industry does not act under the fiduciary standard. Most financial services professionals act under the suitability standard. This means that they only have to provide you advice that’s “good enough”, or suitable, for you rather than being required to provide advice that’s in your best interest. Does this seem right to you?
Michael Kitces states the difference between the fiduciary and suitability standards well: “One is for advisors, the other is for salespeople.” I’ll let you guess which one is which. He also has a great analogy to explain the difference between these two standards: “Suitability means selling a suit that fits you. Fiduciary duty means it actually has to look good on you, too.” No one wants to end up buying a suit on the recommendation of a salesperson just to get home and be told by an objective third party that it’s way too big, that it’s baggy, and that it looks unprofessional.
Work With A Fiduciary
I believe it’s so important to work with a financial planner who ALWAYS acts as a fiduciary because it means that you know you’ll always receive the best advice for your situation. Don’t get me wrong, there are some great people who really care for their clients who work under the suitability standard, but what do you think the likely outcome is when they’re faced with selling a client a product that costs more, will earn them a significantly higher commission, and gets the job done for their client or selling a different product that will cost the client less money, will earn the salesperson a smaller commission, but is the better option for the client? I’m afraid that, too often, money talks.
It’s important to work with a financial planner that you trust and who you know is always going to be acting in your best interest. I’ve outlined steps to find a trusted partner before here and know that they’re incentivized to do what is right for you.
