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 Certified Financial Planner (R) Professional but has no other licenses or registrations.
You might expect him to live up the Certified Financial Planner (R) Professional 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 Certified Financial Planner (R) Professional? It doesn’t.
I can’t understand how an insurance agent is allowed to be a Certified Financial Planner (R) Professional but much to my surprise the professional 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 Certified Financial Planner (R) Professional, you have a reasonable expectation that you are dealing with someone who will be a champion for your interests. That’s what being a Certified Financial Planner (R) Professionalis 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 Certified Financial Planner (R) Professional 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 Certified Financial Planner (R) Professional 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 Certified Financial Planner (R) Professional 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
Daniel Zajac says
Unfortunately its never easy for a retail investor or financial planing client to understand the difference between the various advisors. All to often they listen to a friend or family member who is working with someone (regardless of whether or not that person did their due diligence). But familiarity breeds comfort.
I continue to hope for the day when the CFP becomes the one and only in the financial planning industry. As you said, this doesn’t automatically mean you have a good advisor, but I would take my chances.
Another scary part of this discussion is the business of professional designations. The more designations that are “created”, the more confusing it becomes to the retail market.
Neal Frankle, CFP ® says
Couldn’t agree more….. Thanks Daniel
I have pursuing a CFP and have been with some insurance companies that have not panned out because of the very issues you just mentioned. My issue now is that another company AXA Advisors is recruiting me and my reasoning to go to them is because I would be sponsored for the Series 7 and 66. Do I not these if 2 to 3 years I want to finish my CFP and have a Series 7 and 66. I am in mid 40’s and do not want to work for a bank or a wire house. I am working as a 1099 independent contractor now for a company but am hesitant to move forward because guy will not sponsor me right off until I bring him 10 accounts? Axa although not ideal will sponsor me….. or do I just keep on working on CFP and forget the 7 and 66 and stick out with AXA ADVisors to get License… I do not have time to waste in mid 40’s and picked this career for PEOPLE but like you mentioned I have been surrounded by a lot of Sharks in NYC…. I am good people that just wants to be surrounded by good people offering a Holistic Fiduciary Practice that is not full of lip service… Any advice would be helpful I need to make a decision this week.
Neal Frankle says
I am not really sure what your question is.
I would NOT go with AXA because it’s a commission place and you have to hit up all your friends and relations. I WOULD go with a bank as I’ve said before. Not sure why you are against it. Also, you can get your CFP and your 7 and 66 at the same time. The 7/66 are faster and you should be able to knock those out relatively quickly.
Thanks Mike. Yes….this is the last of the series. Coming from you……it means a lot to me that you found these helpful.
Mike Piper says
Absolutely love this series. Quick question: Was this the final post? I want to include the whole thing in my roundup for the week, but if there’s more coming, I’ll wait until the series is complete.