Update: Be sure to read the comments below. Maybe some of the suggestions below aren't as good as I originally thought.
Here's a simply excellent comment left on my post titled Bad Advice from a "Financial Planner". It details the pros and cons of various "classes" of financial planners:
After eleven years of working for various brokerage firms, I recently started my own firm and registered as an investment advisor (RIA). The RIA is the only means of doing business that allows the use of the term financial planner. The RIA is also the only form of business that holds financial planners to a higher standard than stockbrokers or unregistered financial advisors.
The brokerage firms that I previously worked for claim to have higher standards; however, they do not allow their advisors to register as investment advisors. As a result, their advisors are not held to the higher standards imposed on RIAs. This is not to say that some individual financial advisors who work for brokerage firms do not hold themselves to high standards. It does mean that their advisors are not legally held to the higher standards.
As a financial planner, I have always held myself to these standards. In fact, I founded my own advisory practice to voluntarily agree to be legally held to these higher standards. These higher legal standards are imposed because, as a RIA, I am a fiduciary to my clients.
Clients often ask me “what the heck is a fiduciary, anyway?” The short answer is that a fiduciary is one that is legally obligated to put the clients best interest over the financial planners own best interest.
Let me give you an example to help explain the difference between the financial planner that is held to a fiduciary standard and one that is not. Say an investor, who we will call Bob, has opted to work with a broker at a large brokerage firm. On the recommendation of his broker, Bob purchased a popular class B Fidelity mutual fund. This fund costs Bob a whopping 3% a year, even though the broker was aware of and had access to similar funds that would have been considerably less expensive.
Why was Bob sold such an expensive fund without being given any other options? It is simple. The brokerage firm and advisor earn their living by selling products (earning commissions), so of course they are going to sell the more expensive product to drive revenue (at Bob's expense). Unfortunately, this is a perfectly legal practice for brokers and their advisors as long as the investment was suitable for the individual client's age and risk tolerance. It is legal, but it is not in the client's best interest.
On the other hand, had Bob been lucky enough to work with a RIA financial planner, the financial planner would have been required to explore all options, recommended the option that the planner felt was most advantageous for Bob, and expressly disclose any conflict of interest that the financial planner may have had. As a result, the RIA financial planner may have recommended a comparable Vanguard fund, which only costs a mere .25% per year, in an effort to increase Bob's overall after-expense return. This is what was in Bob's best interest and what Bob deserves.
To make the point even clearer; have you checked out the new disclosures that the SEC has required brokerage firms to place on sales literature for their fee based accounts? Basically the new disclosures state that brokerage firms do not offer advisory accounts and the brokers interests may not be the same as their clients.
This disclosure is needed because it states the reality of the brokerage business model; however, think about the implications of this disclosure. Brokerage firm are required to openly admit that they do not give advice and they may put their interests ahead of their clients interests. Also, think about how the brokerage firms have made these SEC mandated disclosures. Have you ever heard of these SEC mandated disclosures before? I am guessing that you have not, because brokerage firms have opted to make these SEC mandated disclosures by using small print hidden on the bottom or the back of their sales literature.
The brokerage business model is simply not acceptable. Clients deserve better. My advice to you is caveat emptor. Ask your advisor if he or she is a RIA. If your advisor is not a RIA, I highly recommend that you contact a RIA to review your portfolio. You will probably be surprised by what your financial advisor did not tell you.
I do not know this commenter and thus can not recommend (or not recommend) his services, but his thoughts are certainly on target and consistent with what I've encountered. For more on the subject of financial planners, see these links:
Great advice, but he's critically wrong about the RIA. A registered investment advisor is a designation given by the SEC, and refers to the right to give investment advice. It's not actually a certification (i.e. you're not allowed to list it after your name as in "Joe Blow, CPA, RFC, RIA"), and has very minor restrictions -- essentially, nobody but a RIA may manage more than $25 million in assets.
The toughest financial certification to get would have to be CPA, and the additional one that allows CPAs to perform financial planning (I forget the name). Second to that course of action there's the CFP (Certified Financial Planner), which has a phenominal amount of study and experience requirements (although not as much as CPA); next after that would be the relatively new RFC (Registered Financial Consultant). All three certifications, in contrast to RIA, actually have a code of ethics, continuing study, and consumer appeal procedures.
The poster must have made a typo. RIA is NOT what he's talking about.
Posted by: William Tanksley | July 16, 2006 at 12:53 PM
The CPA certification for CPAs wishing to perform financial planning for individuals is "PFS", for "Personal Financial Specialist". (I looked it up on Google.)
The person who sent you that letter is badly mistaken in many areas. For example, he claimed that only RIAs can call themselves "financial planners". Caveat utilitor -- the term "financial planner" is entirely unregulated. Don't assume that because someone calls himself "financial planner" you have recourse.
Look for designations backed by professional societies with strong ethical standards, such as CPA-PFS, CFP, and RFC (and you should check with the society to make sure). Look for experience. Look for helpfulness. Look for references.
Posted by: William Tanksley | July 16, 2006 at 03:21 PM
Here's a great explanation of RIA: http://www.securitiesexam.com/ria.html
It's not a bad thing -- it's legally required for certain purposes. But it's not what the post appears to claim it is.
Posted by: William Tanksley | July 17, 2006 at 06:39 PM