The Secret To Understanding What Makes Your Advisor Tick

Most advisors are honest, responsible and trustworthy but there are always a few bad apples.  I recently wrote a post for Forbes on how some financial advisors sweet talk and swindle their clients.  In it, I described the favorite tricks these small number of stinkers use to separate you from your dough.

How do you make sure this doesn’t happen to you?  How do you know you are dealing with the an honest financial planner?  Even if she is honest, how do you know she is the right planner for you?  It’s starts by understanding one very important principle:

Many (if not most) advisors have multiple licenses and designations.

This complicates what you can expect from your advisor and it makes lots of room for unintentional misunderstanding.  It is also the main reason why investors end up with the wrong investments and/or unforeseen losses. 

Let’s use a few examples to illustrate how important this is. Assume you are talking with a (captive or otherwise) insurance agent who is also a CFP (R) but has no other licenses or registrations.

You might expect him to live up the CFP’s fiduciary responsibility requirement. You’d expect him to put your interests above his own or his firm’s interests because of that CFP(r) designaion. That would be reasonable…

Except it won’t happen.

If this person only has an insurance license, they can only sell insurance products.  And if they are a captive agent, they can only sell the insurance their company wants them to sell.  To make matters worse, they will often push whole life when term life is more approriate.

Regardless of which insurance they sell, if they only sell life insurance you should not look to this person as a true advisor.  Can anyone possibly think that life insurance is the answer to all your financial needs? It ain’t.

Again, it could be worse. If he’s a captive insurance agent he works for the insurance company. We’ve gone over that already. He’ll sell what the insurance company tells him to sell – regardless of being a CFP(R). How does that square with the responsibilities of being a CFP (R)?  It doesn’t.

I can’t understand how an insurance agent is allowed to be a CFP (R) but much to my surprise the CFP board hasn’t asked for my opinion on the matter so we’ll just move on.

Why is this important to you?

Because when this insurance agent holds himself out to you as being a CFP (R), you have a reasonable expectation that you are dealing with someone who will be a champion for your interests. That’s what being a CFP (R) is supposed to mean in my opinion.

There is an inherent conflict between being an agent for an employer (insurance agent or brokerage firm) and holding yourself out to the public as being a fiduciary. And this is dangerous to you if you expect the later but get the former.

This same argument could apply towards stockbrokers who are also CFPs – but not always. Stockbrokers sometimes have a wide enough menu of financial products.  When they do, they have a better shot at being objective. If so, it may mean that he or she can offer you the product that best suits your needs.  But there are still problems with stock brokers because they are obligated first and foremost to their employer – not you.

The brokerage firm often gives them special incentives to sell certain investments, and if the broker accepts those incentives, they are of course putting their own interests above yours. Again, the issue is that if they are a CFP (R) you reasonably expect this not to happen, but it can happen anyway.

And it can get more complicated.  A stockbroker  sometimes also carries an insurance license. She can sell you investments and insurance. This is very common and opens the door for lots of confusion and problems.  And believe it or not it gets worse. When an insurance agent and/or stockbroker is a Registered Investment Advisor or associated with an RIA firm you never know what hat they are wearing.

They do this in order to charge consulting fees and/or manage money for you. This can bring up conflicts of interest similar to those mentioned above when the broker also has a CFP (R) designation.

A Registered Investment Advisor also has a fiduciary responsibility to the client, but how can she deliver on that if she is primarily beholden to her brokerage or insurance company? I just don’t see how she can do it.

The bottom line is that many advisors wear many hats. You just have to be sure which hat they are wearing when you talk to them.

Do I think that advisors intentionally become a CFP (R) in order to lull you into a false sense of security before they rip you off? I do not.

I think most pursue this designation with honorable intentions. It’s just that once they have the designations, certain advisors can’t adhere to the duties associated with the designation because of who they work for. That’s the dangerous part for you.

There is one simple way to make sure these complications won’t hurt you. Ask your advisor the following question:

“How does being a CFP or Registered Investment Advisor influence the advice you’ve just given me?”

No matter who you are dealing with or what licenses or designations they hold, this is the best question you can ask to get clarity on who you are really dealing with. The answer should include some mention of impartiality.

Pay attention to your gut. If the answer sounds like a bunch of hogwash, move on Pilgrim.

Did this series help you understand the dealings you’ve had with advisors in the past? Are you still confused about some aspect of how your advisor works?

This was first published on Wealth Pilgrim August 20,2009