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As many long time readers know, I have been a consistent cheerleader for the CFP® certification that I hold from the Certified Financial Planner Board of Standards, Inc. That’s why I am delighted to announce that I am assuming a new role, “Senior CFP Board Ambassador.” Just like I do in this column, I will provide consumers with timely personal financial advice, explain how current economic and financial news impacts their lives and underscore the importance of having a financial plan.
Tensions are rising in the financial services industry, as the Department of Labor gets ready to release its final rule about the fiduciary standard for professionals who service retirement savers. The rule change is intended to crack down on “backdoor payments and hidden fees,” which cost retirement savers up to $17 billion a year in excess fees and adverse performance, according the President’s Council of Economic Advisers. “Fiduciary” is a fancy way of saying that a financial professional must put your needs first and must pledge to disclose and manage any conflicts of interest that exist. For example, if an investment consultant, broker or insurance salesman recommends that you roll over your old retirement account into a new one, where you will pay higher costs than your old plan, she must document why it is in your best interest to do so and must tell you if she receives any compensation for the investments within the new portfolio. Prior to the pending rule, many investment professionals were held to a lesser standard, called “suitability,” which means what they sold you had to be appropriate, though not necessarily in your best interest.
Maybe you’re thinking, “Who would argue that putting my interests first is a bad thing?” Well, over the past year, big financial firms have fought back against the DOL fiduciary standard, arguing that the new rules would make it prohibitively expensive to service smaller accounts. In fact, they have spent millions of dollars lobbying lawmakers on this very point and have been partially successful - that’s why Speaker of the House Paul Ryan came out against the rule.
Why are they pushing back so much? Because there is a ton of money at stake: according to the Investment Company Institute, as of the end of 2015, IRAs totaled $7.3 trillion and defined contribution plan assets, which are ripe for future rollovers, totaled $6.7 trillion. Under the old rules, the industry made a fortune from these accounts. Joshua Brown of Ritholtz Wealth Management notes, the industry has had “a long and profitable tradition of selling high-cost products of dubious quality to the investing public…Insurance companies, broker-dealers, mutual fund companies, and other backers of the status quo will not go down without a fight.”
And fight they have...the Securities Industry and Financial Markets Association, the lobbying arm of the financial world, said “This proposal would lead to a number of negative consequences for individual investors.” But Ray Ferrara, the CEO of ProVise Management and former chair of the CFP Board, said in his testimony before DOL, “the argument that this rule will diminish the availability of services to middle class Americans is simply not credible.” Adding to Ray’s argument: LPL Financial Holdings recently announced that it would lower, not raise fees for smaller accounts.
Still, those companies that take the position that working in their clients’ best interest is not good business, may chose to push out smaller retirement account owners, but that’s good news for investors—if they don’t want to put you first, why work with them? Given the great strides in financial services technology, you are probably better off with robo-advisors like Betterment, Wealthfront or Rebalance-IRA (all have embraced the fiduciary standard), than a conflicted salesman who is pushing a more expensive retirement product than you need.
When the industry whines about fiduciary, what they are really saying is that the new rules will hurt their profitability. As Vanguard founder Jack Bogle told the Financial Times, “if the wealth management industry loses $2.4 billion, investors are $2.4 billion better off. This is not complicated.”
As the Department of Labor prepares to roll out new rules, which would require investment companies, brokers and advisors to put the interest of retirement savers first, our guest Ray Ferrara, former Chair of the CFP Board, joins us to discuss the fiduciary standard and why the financial services industry should embrace, not fight it. Ray has been one of the key players involved in the national debate surrounding the rules that should govern financial advice and was one of the experts who testified before The Employee Benefits Security Administration, the DOL division responsible for spearheading the change. We began the conversation with an explanation of the proposal, which would require that retirement investment professionals not only be held to a higher standard of putting clients first, but they would also have to fully disclose and eliminate conflicts of interest that exist.
The Financial Planning Coalition, a collaboration of the Certified Financial Planner Board of Standards (CFP Board), the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA), strongly supports the DOL’s proposed rule and notes:
"Retirement investors face a perfect storm in the financial services marketplace. With ever-increasing responsibility for their own retirements and the need to choose from an increasingly complex set of financial products and services, retirement investors more than ever need competent financial advice that is in their best interest. Yet the current regulatory framework allows advisers’ interests to be misaligned with the interests of retirement investors; it does not require advisers to clearly and openly disclose the standard of conduct under which they operate or their actual or potential conflicts of interest; and it permits market practices under which retirement investors are simply unable to distinguish advisers who provide fiduciary-level services from those who do not."
This rule could be a game-changer for the industry. No longer will companies be able to sell opaque, expensive products that once were deemed "suitable" but will not pass the fiduciary smell test. And if you hear complaints from the industry, saying that the rule will mean that they will no longer be able to serve the middle class, I say, THANK GOODNESS! That means that they can no longer peddle their expensive, clunky products, like variable annuities or non-traded real estate investment trusts. And if they choose to raise minimums or fees, consumers have plenty of choices, like services offered by Betterment or Rebalance-IRA, which offer ease and simplicity at a fraction of the cost that those big firms charge.
Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:
Thanksgiving is a time when we count our blessings. In addition to the big stuff, I like to use the opportunity to give thanks to the resources and organizations that improve our financial lives. The Financial Planning Coalition, a collaboration of the Certified Financial Planner Board of Standards (CFP Board), the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA) has provided a strong and unified voice promoting the recognition and regulation of financial planners and increased investor protection. The big task that the Coalition has been trying to tackle is to educate policymakers and consumers about the importance of advice that is in the best interest of the client—the so-called fiduciary standard.
The coalition’s tireless efforts may soon pay off…next on my list of thanks goes to the United States Department of Labor, which is expected to finalize rules that would require financial advisors of all retirement accounts to put customers first. Although the industry has fought hard to thwart the initiative, most believe that it will survive. Its enactment would amount to the biggest changes to the Employee Retirement Income Security Act (ERISA) since that law was drafted more than 40 years ago.
Thanks too must go to technology, which has greatly enhanced the ability to better manage personal finances. Mint, You Need A Budget (YNAB) are among the many free apps that help you keep track of your money, while Acorns and Level Money help you budget and then find even the smallest dollars that you can save or invest.
And a tip of the hat goes to the innovators of financial technology, like the folks at Betterment, Wealthfront, Motif investing and MarketRiders, who have introduced a cost efficient way for investors to better allocate and manage their investments and retirement accounts.
There are also plenty of terrific tools available to help people with their financial lives. The EBRI Choose to Save Ballpark Estimate is an easy to use calculator to help quantify retirement savings needs, FinAid is the go-to site for students and their families to help understand the various ways to pay for college; and LifeHappens helps families understand their life and disability insurance needs.
I am often asked about which financial blogs that I use to augment the multitude of publications that I need to do my job. I am thankful for the terrific work of Bill McBride of the Calculated Risk blog. In addition to his wise insights about the housing market, Bill has a wonderful way of providing much need context to a world of economic numbers. I am also grateful for Barry Ritholtz’ “The Big Picture”, with its great mix of information, humor and a healthy dose of skepticism. Although a bit wonkier, I always learn from economics professors James D. Hamilton and Menzie Chinn, who are the brains behind Econbrowser and Mark Thoma of Economist’s View.
What would I do without economic resources, like the Federal Reserve Bank of St. Louis’s Reserve Bank FRED blog, with its nifty charting features; the Federal Reserve Bank of New York’s research on Household Credit; the Bureau of Labor Statistics’ historic databases; the Bureau of Economic Analysis’ interactive data; and the IRS’ rich web site? The people at these organizations have also been incredibly generous with me.
On the research front, the folks at Pew Research Center, the Center for Retirement Research at Boston College and the Georgetown Center on Education and the Workforce are producing some of the most interesting and useful publications, which help me in my job every day.
And finally, the greatest thanks goes to you—the readers, listeners and viewers, who take time out of your days to absorb my content and who generously provide commentary, both and good and bad. To quote Alice Walker, the words thank you “expresses extreme gratitude, humility, understanding.” On this Thanksgiving, thank you.
The Financial Planning Association’s (FPA) National Conference last weekend could have been presented by “The F-Word”: Fiduciary. The weekend brought together 2,000 CFP® professionals, all of whom adhere to the fiduciary standard. This is the standard of care, which requires that financial professionals to put the interests of clients first. (Those financial professionals with the CFP® certification from the Certified Financial Planner Board of Standards (CFP) are fiduciaries, as are CPA Personal Financial Specialists, members of the National Association of Personal Financial Advisors (NAPFA), as well as 17,000 of the 24,000 members of the FPA. That principal might seem obvious to consumers. Of course someone who is talking to me about my financial life should put my interest before his or his company’s interest, right? That’s why according to a recent survey conducted by the CFP, 9 out of 10 Americans agree that when they receive financial guidance, the person providing the advice should put the consumers’ interests ahead of theirs and should have to tell consumers up front about any conflicts of interest that could potentially influence that advice.
Unfortunately, while many consumers are increasingly turning to professionals to help guide them (40 percent of respondents, up 12 percent from five years ago), many of these individuals are working with folks who are not required to put the interest of clients first.
This survey was conducted as a quiet battle is going in Washington DC. Earlier in the year, President Obama endorsed a Department of Labor proposal, which would require all financial professionals to act in a customer’s best interest when working with retirement investors. The Securities Industry and Financial Markets Association, the lobbying arm of the financial world, said “This proposal would lead to a number of negative consequences for individual investors.” A number of large firms that provide retirement services echo the SIFMA sentiment and have submitted alternative proposals to DOL.
The Financial Planning Coalition, which is comprised of the CFP Board, the FPA and NAPFA support the fiduciary rule and note that the change “is a long overdue and much-needed update to the 40 year-old definition of ‘fiduciary’ under the Employee Retirement Income Security Act (ERISA).” The coalition dismisses alternative proposals from financial services organizations and firms, saying that they would dilute “the basic requirements of a true fiduciary standard under either ERISA or securities law.”
Paul Auslander, the former Chairman of the Board of Directors of the Financial Planning Association and Director of Financial Planning at ProVise Management Group, LLC, told me that considering that most consumers believe that they are receiving untainted financial advice, the rules should be updated to do so.
“It’s no wonder that consumers are confused,” says Auslander: “Many professionals call themselves ‘advisOrs,’ but only those who are registered under the Investment Adviser Act of 1940 are ‘advisErs’.” Notice the spelling: Financial advisors (with an “o”) “tend to be titles for salespeople in financial services, while those who are advisers (with an “E”), are likely to follow the fiduciary standard”.
As a veteran of the industry, I asked Auslander why some companies are pushing back so hard against the change. He believes that there is a unique business opportunity that these fearful firms are missing. “The company that has the professional guts to be the first to plant the flagpole on top of the fiduciary mountain will be richly rewarded by consumers, who will flock to the early adopters of a true, legally-binding client-first model. It's mind boggling to me how few senior executives get this.” And for those financial professionals who are resistant, Auslander reminds them “Doing the right thing is a huge differentiator, and being legally obligated to be accountable for your company's actions is the only way to do it.”
To find a fiduciary adviser, you can use the Financial Planning Association's tool, the CFP Board's search engine or for fee-only advice (those who do not take any commission), you can go to NAPFA.
Don Cloud, president and founder of Cloud Financial, began his career in financial services industry in the 1990s with a mission to educate and inspire individuals to play an active role in their personal finances. Don discussed what to do if you’re facing an unexpected early retirement; how he manages clients that don't act in their own best interests; and the power of diversification…and he has an awesome accent too!
Can we make dreams come true? That's what Jeannie wants to know! She wants to spend the first few years of retirement in Paris before returning to the US. Can we help make her dream a reality?
The housing market may be recovering, but not enough to help Jeff, who needs advice about selling a house that is underwater. Alex has a question about whether or not to sell a rental property and Chet wants to know about required distributions.
Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:
Sure it's summer, but that doesn't mean you can't spend a little of your time at the beach or the mountains contemplating your retirement, right? In fact, your time off might encourage you to think a little more seriously about how you might spend those non-working years. In addition to dreaming, you'll have to think ahead and get your portfolio in shape for the transition.
Paul is 70 and asked about his portfolio as well as his Required Minimum Distribution, Angela from Phoenix is preparing her investments for retirement and Sybil has been advised to combine several of her TSA accounts - should she? Scott MI is just 45, but he is "retiring" from a union job--what should he do with his pension?
Our younger listeners are also thinking ahead to retirement. Jack and his wife are in great shape and want to know what to know how to continue to maximize their cash flow; Amey wants to concentrate on accumulation for the next five years; and Christine from Perth, Australia has about $5-$7K each month that she and her husband are saving for a new home in CA. Should they direct the money into a money market account or should they pay down an existing mortgage?
Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:
Just in time for summer vacation, Emmy-winning investigative reporter and producer, Peter Greenberg joins the show to provide great travel tips. Peter is the travel editor for CBS News and also hosts his own television show, “The Travel Detective with Peter Greenberg,” on public television.
Peter covered a lot of ground, including: Tricks for navigating the consolidating airline industry (conduct research on line but don't give up on the phone yet); why travel agents are on the rise again; why now is a great time to book a cruise; what you need to know about traveling to Cuba; why you should NOT cancel your trip to Greece; and what you need to know about trip cancellation insurance.
We also covered a great question from Jessica, who is looking to make a career change from medicine to financial services. The financial planning industry is poised to grow, so she should check out the CFP Career Center!
Kris wanted to know the basics on Social Security for married couples and Carol weighed in on the Windfall Elimination Provision and the Government Pension Offset.
Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:
Guest Gary Schatsky, a fee-only financial advisor, Chair Emeritus of NAPFA and Annuity Hater, joins the show to discuss why annuities are rarely advisable (Gary says just 5 percent of the time!) He also weighs in on the concept of fiduciary and explains why he believes that working with a fee-only advisor vastly reduces the potential for conflicts of interest.
Kenny from NY read my recent post, "Spring Cleaning for your Money" and wanted to know how to reduce the taxable income generated from some of his mutual funds. One easy fix: use index funds in taxable accounts and keep managed funds in retirement accounts.
Meanwhile, Terry from MN is sitting pretty in her early retirement, but is not sure whether she should roll over her old 401 (k) into an IRA; and she also needs allocation tips. Poor Michael was unable to max out his retirement contributions and now is starting a fatter tax bill, while Steve asked about beneficiary IRA accounts and Wayne asked for advice about changing careers - from a pilot to a financial planner.
Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:
Pity the poor consumer of financial services. According to The Financial Planning Coalition, a collaboration of the Certified Financial Planner Board of Standards (“CFP Board”), the Financial Planning Association® (“FPA”), and the National Association of Personal Financial Advisors (“NAPFA”), “consumers who want financial planning services are…unable to differentiate those who are truly competent to provide financial planning services from those who are using financial planning as a marketing tool.” The Coalition recently released a white paper, “Consumers Are Confused and Harmed,” which highlighted the problem. I know that you too will be shocked, just shocked to learn that the misunderstanding is not solely our fault…it has something to do with the fact that some financial service providers “are contributing to the confusion in the marketplace by identifying themselves as financial planners but not providing financial planning services.”
The Coalition points to a Cerulli study, which found that over 166,000 financial advisors self-identified as members of a financial planning focused practice, but after conducting detailed analysis, Cerulli “determined that only 38 percent of the self-identified financial planners actually had financial planning focused practices. In other words, over 100,000 financial advisors incorrectly self-identified as being part of a financial planning practice.”
Let’s think about this in another way. Let’s say that you go to the doctor to have a knee replacement and the doctor identifies himself as someone who does orthopedic surgery. Upon further analysis, you find out that the guy is a primary care physician and not a surgeon. You sure would have liked to know that fact, before you went under the knife, right?
According to Kevin Keller, the CEO of the CFP Board “American consumers looking for financial planning services face an uphill battle when it comes to identifying a competent, ethical financial planner. Just as consumers expect a medical doctor to have an M.D., a lawyer – a J.D., an accountant – a CPA, they should expect their financial planner to demonstrate expertise, experience, and accountability, and be held to standards the public can understand and trust.”
Here’s the problem: there is NO uniform regulation of financial planners, which would ensure that our expectations are met. In 2011, the SEC’s “Study on investment advisers and broker-dealers advocated that the “fiduciary standard” be applied to the industry. A fiduciary duty means that a financial professional must put your needs first. (CFP® professionals are held to the fiduciary duty.) Those who aren’t fiduciaries are held to a lesser standard, called “suitability,” which means that anything they sell you has to be appropriate for you, though not necessarily in your best interest. The SEC has noted, “most [investors] are unaware of the different legal standards that apply to their advice and recommendations…and expect that the recommendations they receive will be in their best interests.”
The coalition’s white paper corroborates the SEC: “A full 82 percent of consumers believe that a financial planner is essentially the same as a financial advisor, and there is only slightly less confusion between the titles financial planner, wealth manager and investment advisor.” And the vast majority of those who are held to the suitability standard would like to keep you mired in confusion. That’s why SIFMA, the industry’s lobbying arm, has spent millions of dollars to prevent the fiduciary standard from becoming law.
Lauren M. Schadle, CEO/Executive Director of FPA cuts to the chase: “It’s really pretty simple. Consumers who seek integrated, financial planning and receive narrow advice or one-product solutions with their life savings are harmed by the lack of appropriate regulation…time and time again, consumers are misled and harmed by those who simply use the moniker ‘financial planner’ as a marketing tactic but fail to deliver actual financial planning.” NAPFA CEO Geof Brown adds that the current environment can lead consumers to purchase “investment or insurance products that are inappropriate for them.”
What’s the fix? Until the government adopts the fiduciary standard, your best bet is to come right out and ask any potential or current financial professional, “Are you a fiduciary?” If not, you may want to find someone who is.
Here are three resources to find fiduciary advisors:
