Today’s guest posting is by Barbara Friedberg of Barbara Friedberg Personal Finance. I love Barbara’s blog, which is full of ideas to make your personal and financial wealth grow. She takes complex topics and breaks them down so they’re more understandable; she also writes in a very down-to-earth way and shares her personal experiences, which makes for interesting reading. (For starters, check out Barbara’s ‘My Story‘ page, where she shares how her father overcame a childhood of poverty. I’ll give you a hint – it involves sandwiches and pianos.)
We’re both members of Yakezie, one of the world’s largest networks of personal finance and lifestyle bloggers. This month, select Yakezie participants were paired up to exchange guest posts on each other’s sites, and the topic is, “What is your biggest financial pet peeve?” I know you’ll enjoy her take on this compelling topic:
Financial Advisors Who Get Paid To Sell Products Bother Me
How it all Started
When I first began investing while in my 20’s, I went to a stock broker who sold me funds set up by my broker’s investment company (proprietary funds) with really high fees.
I didn’t know any better!!
I didn’t think about how he was paid, and since I didn’t see his fee up front, I thought this was a good situation. “Wow, I’m getting this help with my investments from a professional FOR FREE!”
I didn’t realize this guy was a SALESMAN!!! The more he sold me, the richer he got!
What is the Background of These Financial Professionals?
The Investment Answer gave the best explanation I’ve read for the variety of financial advisors and designations. Look, I’m a portfolio manager and I can barely keep them all straight, so how can one expect the public to understand the myriad of people trying to “help” manage your money?
Here’s my “Cliff Notes” version of this tricky subject.
Retail Brokers, Financial Advisors, and Financial Consultants
What are they?
- Agents who work for a firm and sell that firm’s products
How they get paid:
- Either by commission on a sale or buy of a financial product for you.
- Or, a single fee for managing your account.
What’s the problem?
- If they only get paid when you buy or sell, THERE IS A CONFLICT OF INTEREST and a big motivation for the advisor to encourage you to make more trades!
- Even if they charge a fee to manage your account, they are encouraged to sell the firm’s approved “products”.
- There are a variety of “designations” and titles these salespeople hold; Registered Representative, Certified Financial Planner, Chartered Financial Analyst, and more. Yet, no designation is legally required.
This type of arrangement really annoys me.
Who Can I Trust?
According to Karen Blumenthal, in When Your Advisor Can’t be Trusted, WSJ, March 12-13, 2011, a “registered investment adviser” must act in the clients’ best interests, or as a fiduciary. So that’s one factor to consider.
The other key factor to consider is compensation. If you want to hire a professional to manage your money, instead of doing it yourself, make sure you get someone whose interests are ALIGNED WITH YOURS. Get his/her compensation methods up front. If the advisor charges a percent of your assets under management, then the more money you make, the more money the advisor makes!!!!
An Independent Fee-Only Financial Advisor whose experience, education, and philosophy is in line with yours is a good place to start.
Anyone with a CFA designation (CFA) has the “gold standard” of designations. The CFA holder passed several difficult exams, worked in the field for many years, and has passed the equivalent of several years of graduate level coursework.
Go to the Financial Industry Regulatory Authority (FINRA) or Securities and Exchange Commission for some great information on the subject. Two of my favorite Independent Fee-Only Advisors are The Chicago Financial Planner, Roger Wohlner, and Dan Goldie, an author of The Investment Answer.
What is your experience with financial professionals? If you are a financial professional, do you agree or disagree?
This is a guest post from Barbara Friedberg, editor-in-chief of BarbaraFriedbergPersonalFinance.com. Learn personal finance from a real life Portfolio Manager. Visit her site for a FREE eBook, 20 Minute Guide to Investing.
[Editor’s note: The views and opinions expressed in guest posts are those of the author.]
About Eliza Cross
Eliza Cross is the author of 17 books, including Small Bites, 101 Things To Do With Bacon, and BERRIES. She enjoys sharing ideas to simplify cooking, gardening, and home projects. She is also the owner of Cross Media, Inc. and founder of the BENSA Bacon Lovers Society.
21 thoughts on “Guest Post – Barbara Friedberg Personal Finance”
Hi Eliza, The article looks great, thanks so much for publishing my post on your site!!
A CFP too has passed several difficult exams, and has many years experience. You can’t Even take the exam to get your CFP without minimum 3 years expeience. A CFP also requires continuing education every single year or they lose the designation. A CFP also has a code of ethics they have to adhere to saying that if they work in a commission structure, it can’t influence in the end which products they sell. Of course they’ll profit the best if you do choose the products that give them the highest commission but they are legally required to help you pick the best product for you. Avoid shady characters and you should be safe, I mean, jeez. Just because someone isn’t fee only you really should be telling people to avoid them because for example the city I live in has only 2 fee only CFPs. The companies that CFP would work for in my city set up commission structures and that’s all there is to it. I have no option to charge fee only, although I’d prefer it. Also, a CFP has to tell you up front how they are being compensated, if they are being compensated by commission. Your statement up there ‘the more money you make, the more your advisor makes!’ you said that like it’s a bad thing. If I’m doing whas in your best interest and helping you make tons of money, what do you have against me earning money? I have to eat. I want my doctor to get paid. I want my lawyer to be compensated for his or her good work. Why not your advisor? As long as you have someone with experience and a good designation, who is upfront about their compensation, then you shouldn’t have too many issues about trusting then. I would never sell you the wrong product because of a higher commission. And I don’t have the option to set up a fee only payment structure. Please don’t bash people like me in your blog.
There are a few inaccuracies in this post.
You can sit for the CFP exam without the three years experience. If you pass, then you must gain three years of experience before using the CFP trademark as a credential.
There are plenty of “codes of ethics” that any certified professional must “swear” to but do not have the force of the law behind them. (RE: comments about what a CFP “has to do” like “legally required to help you pick the best product for you”. The CFP board has no legal enforcement power. They recently admonished, suspended, or otherwise disciplined 27 CFP in February, 2011 for CFPs not doing what they “had to”.)
Registered Investment Advisors (be they CFPs or not) must act as fiduciaries BY LAW, which IMHO produces a much greater chance of your interests being served above your advisor’s.
I have nothing against CFPs or commissioned salespeople. Just make sure you know which you have before you sign a contract.
I recently attended a briefing on the requirements of the new Dodd-Frank legislation and I can assure you that it will have little affect on shady behavior. In fact, I would not be surprised to see more fiduciaries disbanding and crossing over to become commissioned salespeople due to the increased burden that this legislation creates for those that were never part of the problem.
Human behavior is, in fact, quite predictable given the understanding of the incentive structure that they operate within.
CFPs can and do still sell garbage, and any CFP knows it.
“If they only get paid when you buy or sell, THERE IS A CONFLICT OF INTEREST and a big motivation for the advisor to encourage you to make more trades!”
Another thing, in regards to this quote from you, it’s illegal for it to be a conflict of interest for me! There is a code of ethics we adhere to, I have to read the entire standards, understand it, and sign it before (before!) I can even take the exam! If someone were to realize that I clearly sold then a terrible product for their portfolio because it had a huge commission for me, they can, and very rightly should, sue me! This whole conflict of interest thing that seems to be the biggest factor of your pet peeve is a non-issue because it’s simply something that isn’t done.
Another tip – word of mouth. If your friends, family, coworkers recommend a CFP, you can probably trust him or her because you’re right,maybe some shady shady characters out there do sell you based on how much they’ll make, despite it being illegal. But that person isn’t going to have a good client base or be getting recommendations and references. Stick with successful, experienced designates, and shop around for the best. If youve found someone you trust don’t worry about the paystructure, because I’m helping you, I’m your advisor, your friend. Don’t you want me to be compensated for my work?
Lisa, Thank you for the long and thoughtful comment(s). Clearly, most situations are not as clear cut as we would like to believe. I’m sure there are CFP’s who are not fee only who are honest and put their clients interests first. That being said, there is a conflict of interest if they only get paid if the client makes a trade.
I really appreciate your response and support the idea of doing one’s own due diligence and obtaining referrals.
I couldn’t agree more! A fee-only based advisor is the only way to go!
Barbara thanks for mentioning me in your post. I am clearly biased, but I feel that an advisor who is compensated for selling a financial product has a difficult time providing objective advice. I am a member of NAPFA, the largest organization of fee-only advisors in the country. If any of your readers are interested here is a link to our find an advisor site http://findanadvisor.napfa.org/Home.aspx. They can search for an advisor by entering their zip code, or by entering an advisor’s name if known. Additionally NAPFA has just published their Pursuit of a Financial Advisor Field Guide http://napfa.org/UserFiles/File/PursuitofaFinancialAdvisorFieldGuide.pdf a booklet with tips for choosing the right advisor.
I’ve been working in the industry for 12 years, am a CFP, and get paid on commission. I’m with Ed in that it makes sense to be careful who you work with, as sadly, fiduciary responsibility is not easily enforceable…in any profession.
I do think you can get objective advice in a commission based environment. There are good folks out there. And to suggest there aren’t is a massive generalization, and in my opinion, incorrect.
@Kevin, Certainly it is not impossible to get good advice from an advisor paid by commission, but the relationship does have a bit of a conflict of interest. That said, there are honest folks in all professions (and the reverse as well).
Barb, I couldn’t agree more.
As for the fiduciary duty to sell only what the advisor knows to be in line with their customers need, I don’t think CFPs step out of line here. HOWEVER, their firms often do…
So many CFPs sell funds loaded with 12-b1 fees simply because it is all they have available.
To be quite frank, I wouldn’t consider going to anyone with less than a CFP, but I wouldn’t immediately say that a CFP is any better than someone without one. It all comes down to what they have to sell you, and what they often have to sell are 12b-1 loaded funds, or double-fee target date funds.
Tying investment advisory to one of the worst (in my opinion) businesses on earth–insurance sales–was the final blow to what could have been a good business. If you’re serious about getting solid financial advice, go to a firm that is fee-only by the hour with CPAs/CFAs/CFPs on staff.
I believe the method of compensation based on asset management method is the best because in this case the consultants aim is to increase our profits as that is the only way his compensation can increase
At risk of sounding self promoting, I have a blog post explaining three types of “financial advisors” and how they get paid:
A CFP is certainly a very qualified person. However, I know a CFP who sells over-priced life insurance and annuities. his CFP is not to help his customers, but to blindside them. A CFP does not mean that advisor is without conflict of interest. The best way to check if an advisor has conflict of interest is to read his firm disclosure at the SEC’s advisor directory – http://www.adviserinfo.sec.gov.
I love the post! It is thoroughly explained i would’t add anything more! Great!