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Do Certified Financial Planners Really Put Clients First?

I was having a conversation recently with a fellow Certified Financial Planner (CFP) on our sometimes not-so-noble profession. The tone of the discussion reminded me of many I had back in college, when everything was hypothetical, and when all of the world's problems could be reduced to black and white, and then resolved with idealized solutions. In this instance, the CFP was preachily telling me that there should be standards in place to make sure planners are putting the client's interests first. This seemed reasonable, as well as consistent with the organization that issues the CFP license, the Certified Financial Board of Standards, Inc, and their statements that a certificant must use the "duty of care of a fiduciary."

But what is a fiduciary? defines a fiduciary as "a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty." By this definition, anyone acting in such a capacity should be putting the client's interests first.

So I thought I'd test the tread on this fiduciary, and asked what he would put a client in if that client might need their money in a year or less. He responded "cash, of course." I then asked what the money market he used for cash was paying, and he responded that it was paying about 0.2%.

I could see his agitation barometer beginning to rise as he and I both knew he charged 1.0% or more to manage assets, which meant that the cash portion had a negative return after his firm's fees. I clued him in on the fact that FDIC insured savings account were paying 1.55% or more, and there would be no fee involved since banks paying the highest rates don't work though advisers. I implied that, seeing as he was all into putting the clients' interests first, he would waste no time in telling his clients about these quick and easy ways to boost returns. The silence was deafening, and the conversation was over. Am I a people person, or what?

In reality, this CFP along with many others would lose fees if the client took some money out of their account and moved it to a higher yielding account. Yet, if CFPs walked their fiduciary talk, they would all be advising clients to use one of the highest paying cash accounts backed by the FDIC or NCUA. In the real world, though, the talk doesn't get all that much walk.

What this means
It's easy for anyone to believe they have the highest ethics and always put their client's interests first. It's much harder to practice that belief, especially when it hits one squarely in the wallet. I've found that planners that tout their ethics the most also tend to be the worst offenders.

My advice is to always understand how any adviser is making money from you and what incentives they may have. Then think how they may be biased in giving you advice. It's no different than the surgeon's bias to operate or the lawyer's bias to sue. It's irrational to think that incentives don't matter.

When an advisor says don't pay off the mortgage, could it be because the planner may make less money? If the advisor builds a complex portfolio, could it be because he wants you to think investing itself is complex?

Never blindly accept that your adviser is your fiduciary and will always act in your best interests. That goes for CFPs and every other designation. One of my favorite expressions that I'd like you to keep in mind is "When you have a hammer in your hand, everything looks like a nail." Who knows what hammer your adviser may be holding?

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