Jump to content
Tom F

Confusion about fiduciary standards

Recommended Posts

I asked a local "financial advisor" if they new any fee only (hourly) financial advisors in my community.   There response confused me.

"No, to my knowledge, I do not know anyone operating like that.  Very recently, FINRA and the Department of Labor have really cracked down on advisors not operating according to a Fiduciary standard, thus, I would imagine, anyone who would have been charging like that has had to change their structure. It is difficult to be a fiduciary and offer one off advice. Locally, I have never known of anyone to. In the current regulatory environment, it would be difficult for a licensed individual to do.

I thought the fiduciary standard was driving advisors away from commission based structure and to more transparent fee based model.  Is this not the case?

Share this post


Link to post
Share on other sites
21 hours ago, Tom F said:

I asked a local "financial advisor" if they new any fee only (hourly) financial advisors in my community.   There response confused me.

"No, to my knowledge, I do not know anyone operating like that.  Very recently, FINRA and the Department of Labor have really cracked down on advisors not operating according to a Fiduciary standard, thus, I would imagine, anyone who would have been charging like that has had to change their structure. It is difficult to be a fiduciary and offer one off advice. Locally, I have never known of anyone to. In the current regulatory environment, it would be difficult for a licensed individual to do.

I thought the fiduciary standard was driving advisors away from commission based structure and to more transparent fee based model.  Is this not the case?

Hi Tom,

Yeah, a couple of friends had the same response. They don't charge an hourly fee. Calling attention to the "fee-only," just a ruse that says they don't sell conflicted products. 

We all know that insurance agents or brokers are not bound by any fiduciary guidelines. And we all know that there is NO fiduciary regulations with annuities in 403(B) plans with public k12 school district 403(b). NONE because the vast majority selling these rip off products are insurance agents.  

The Certified Financial Planner (CFP) is trained to manage a portfolio and are the most likely to be a genuine fiduciary. Sure, they don't sell commissioned products but they found out they can make more money from the AUM than a one-time commission. 

Garrett Planning Networks will remove any adviser on their network who declines to service a client who just wants to pay by the hour. I have written a story about one such person and the Garrett Planning Networks was very upset and eventually removed that financial adviser. Read my write up here: https://latebloomerwealth.com/did-garrett-planning-network-pass-the-smell-test/ 

I am not happy with this development in recent years. Like you, I thought that the hour fee would solve all of the high-cost problems and conflicts of interest in one fell swoop. For the most part, it did solve the conflicts of interest part of the problem with selling commission-based products,  but the AUM is WAY too high and merely replaced those hideous commissions. I can understand a .25% or .50% but 1.0% AUM or more is a big problem! That's way too much money. We all know how just 1.0% drains our portfolio over time. 

My plumber, my tax man or my prenup and estate planning attorney never charge an ongoing fee forever. They charge a flat fee and that's the end of it. Why can't financial advisers do the same? Because people are so intimated by the financial markets and financial planners, most people have little choice but pay the 1.0% or more AUM.

 

Share this post


Link to post
Share on other sites

Hi Tom,

I have a little more to say. Not sure if I answered your question because it is a systemic problem within the financial advice industry and the Garrett Planning Network and the National Association of Personal Financial Advisors.

I cannot overemphasize that you brought up a touchy but needed topic. How can genuine fiduciary advisors earn a living for all they do? My discussion with an adviser who rejected the hourly pay model and had the audacity to say to me that "it doesn't work" which directly conflicted with the Garrett Planning Network's requirement that their advisers must provide hourly service, is puzzling to me too. Unless these advisers are reported, nothing more can be done. 

To be fair, people do not like writing checks either and end up "watching the clock" or go to another adviser who offers advice for "free." It is a complex problem with one possible solution for now.  How about this business model, financial advisers?

Forget the hour fee model because the vast majority of advisers need the AUM too and clients hate writing checks because they are so diluting thinking that they are getting this service for free! (Many surveys support this mistaken notion!).  

How about fiduciary financial advisors charging 2.0 or even 3.0% AUM for the first couple of years to cover the initial costs of looking at their client's total financial picture? Financial advisers do a lot because the days of creating a complex portfolio are over. It only takes a few minutes to construct a low-cost fully diversified portfolio. But advisers do other things too: estate planning, tax harvesting and planning, life insurance needs, cash flow especially those of us in retirement, but most importantly they serve as financial coaches and keep clients from panicking when the markets get crazy. Then after a year or two of that 2.0% or more AUM to cover the start-up costs (because people hate writing checks), FA can lower their AUM to under 1.0% because there is less work to do. 

I also refer to Scott Dauenhauer's book for professional advisers on how to make a living serving the public k12 market. The Wild West: Providing Fiduciary Advice to Public School Employees. He has several additional ideas of making money: https://www.amazon.com/Wild-West-Providing-Fiduciary-Employees/dp/B01F96WA2A/ref=sr_1_1?keywords=scott+dauenhauer&qid=1582117331&s=books&sr=1-1

That financial adviser you talked to will probably never read Scott's book or change his or her business model. We all wonder, I wonder, what is the average AUM for genuine fiduciary advisers who serve the K12 market? 

Share this post


Link to post
Share on other sites
23 hours ago, Tom F said:

I thought the fiduciary standard was driving advisors away from commission based structure and to more transparent fee based model.  Is this not the case?

 

12 hours ago, sschullo said:

I am not happy with this development in recent years. Like you, I thought that the hour fee would solve all of the high-cost problems and conflicts of interest in one fell swoop. For the most part, it did solve the conflicts of interest part of the problem with selling commission-based products,  but the AUM is WAY too high and merely replaced those hideous commissions.

The Trump administration killed the Obama-era fiduciary rule. I won't comment on the effects surrounding the buzz/speculation related to the fiduciary standard. However, for anybody reading this thread I wanted to make a clear point:

Either you're paying an ethical advisor on the front end or you're getting a "free" advisor who is selling you conflicted/expensive investments. In both cases it is very much against your interest to hire the advisor because of three things:

  • You're working with small margins because the stock market is a get rich slow scheme; you're not pulling in huge amounts of money in any given year.
  • It costs a lot of money to pay for a "professional's" salary.
  • The professionals cannot beat the total market index funds so they're not bringing anything to the table. You're paying for nothing.

You don't need the advisor because:

  • You're clearly smart enough and capable enough to buy 3 total market index funds (bonds, us stocks, and international stocks) and keep them in proportion to each other over the years.
  • Even if you're lazy and don't want to spend the 2 hours a year to keep them in proportion to each other, you can spend an extra 0.10%, buy an all-in-one fund like a target date fund, and literally do nothing (this is your "advisor").
  • You already know that you should be trying to max out your tax advantaged accounts (IRA, 401k, 403b, etc.)
  • Folks at sites like this one or bogleheads or any number of others will give you free, unconflicted advice!

...the advisor isn't giving you anything, his job should go the way of the travel agent.

Share this post


Link to post
Share on other sites

Tom 

Were you looking for an hourly fee-only advisor, or looking for somebody else? 

If you are looking for yourself, I wonder what you think about what Ed said.

I agree with him 100% regarding the investment process and the psychology behind staying the course. But I think is fine to pay for an adviser as long as the client learns enough after a couple of years, and then do it yourself. It makes little sense to have a target-date fund or a balanced fund and have an adviser!

I have paid the hourly fee to a financial advisor just to see if my diversified portfolio was on track years ago when I did not know what a diversified portfolio looked like. Nowadays, there is no excuse as hundreds of blogs and financial websites exist today that offer portfolio models. I still pay for help with my taxes and an attorney to set up my trust.

But I have also discovered, with my head-scratching, is why so many smart people who have read up on investing and still don't get it (and they are not lazy). 

 

 

Share this post


Link to post
Share on other sites
On 2/18/2020 at 9:59 AM, Tom F said:

I asked a local "financial advisor" if they new any fee only (hourly) financial advisors in my community.   There response confused me.

"No, to my knowledge, I do not know anyone operating like that.  Very recently, FINRA and the Department of Labor have really cracked down on advisors not operating according to a Fiduciary standard, thus, I would imagine, anyone who would have been charging like that has had to change their structure. It is difficult to be a fiduciary and offer one off advice. Locally, I have never known of anyone to. In the current regulatory environment, it would be difficult for a licensed individual to do.

I thought the fiduciary standard was driving advisors away from commission based structure and to more transparent fee based model.  Is this not the case?

 

The FA's response confuses me because there is currently no fiduciary standard as a law.  Fiduciary is just an adjective that means only about as much as you trust that individual.  Without the fiduciary standard, which has been dropped by the current administration, it's basically the same as saying I'm a "good" or "fair" advisor.  It sounds nice but doesn't mean a whole lot.

If you have absolutely no interest in personal finance, then it might be worth it to find a good AUM advisor to keep an eye on it for you.  I think Vanguard's Personal Advisory Service for .30% is about as much as anyone should pay unless their situation is extremely complicated.  Or better yet, read a few books, listen to a few podcasts, etc. and you'll learn more than enough in no time.

 

 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

×
×
  • Create New...