FAs, FPs, IAs, CFPs ... Lions and tigers and bears, oh my!

[OldShooter]

A clever post from another thread:

Quote:

Originally Posted by SnowBound ... everyone here likes: ... Saying not so great things about FA's.

I am offering sort of an editorial I guess. I think people here and elsewhere are often sloppy in writing and thinking about advisors and roles.

First, "Financial Advisor" is an imprecise term. Anyone with $15 of headroom on a credit card can go to vistaprint.com and make him/herself a Financial Advisor with nice business cards. "Financial Planner?" Same deal. "Wealth Manager?' Same.

"Investment Advisor" can be made a little more definitive when written as "Registered Investment Advisor." This has legal teeth.

Where IMO it gets sloppy is when we don't clearly describe an advisor who is involved with the client's entire financial life. Not just investments but life insurance planning, estate planning, educational savings planning (i.e., 529s); the whole enchilada. IMO this is an important role for the majority of people, but probably best purchased on an hourly or flat rate basis. If I use the term "FA" for this role, then it makes no sense to also call the people at the brokerage houses FAs. They are, at best, investment advisors. Sure they may contribute advice in other areas of the client's life but at the bottom, that is not their role.

CFPs aspire to be the broad kind of advisor, not just investment advisors, but many de facto function simply as investment advisors.

Then there is the notion of fiduciaries. "Registered Investment Advisor" firms are legally fiduciaries as are their reps, "Investment Advisor Representatives (IARs)." CFPs are not fiduciaries by virtue of their having purchased this designation from a private company. (There is a lot of misinformation out there on this.) A CFP may be and often is, a fiduciary by virtue of his/her employment by a Registered Investment Advisor, but a CFP employed by a brokerage house as a registered representative is not.

So ... whats the point? I think we confuse new people, and even ourselves, by using imprecise language when we talk about these roles. So I suggest that we should try to do a little better. That's all.

[audreyh1]

Thanks for explaining the terms.

So there are Registered Investment Advisor companies out there and they are not brokerages, but independent firms that may use a brokerage?

[Sarah in SC]

Old shooter, that’s a pretty good description of the issues, however I will say that the CFP designation, which requires an educational course that usually takes about two years to complete, a three year apprenticeship under a CFP, and a two day comprehensive exam, does include language about being a fiduciary. However, as you pointed out, a CFP working in a brokerage house may not truly fall under that.

As a CFP for an RIA, the fiduciary role is integral. I’ve never heard it described as being purchased, but I guess the yearly fee paid to use the designation could be considered buying it.

Financial advising is a murky world, and unfortunately, it is the folks with smaller portfolios who have the hardest time finding good advice. Fee-only planning is ideal for these folks, but they are often lured into “free” advising that turns into sales pitches for high fee mutual funds, expensive insurance policies, and complicated annuities.

CFPs are trained to be quarterbacks, overseeing all aspects of financial life, including estate planning, taxes, retirement and college funding, as well as investing. For me, the estate planning element is by far the most interesting.

One thing I will throw out there: if you are comfortable and happy running your portfolio and investing life without advising, that’s awesome. But please have some plans in place if your spouse is not prepared to handle it alone. I work with many widows who really struggle (I’m sure there are plenty of widowers as well, but our demographic skews older and more traditional roles).

I took over my parents’ finances a few years ago, and my mother would honestly be sitting in the dark right now if not for that. I’ve also had to fend off parasitic siblings, negotiate insurance, and arrange for the most mundane of things because she’s never done these for herself prior to my father’s death.

And yes, Audrey, RIAs rarely have custody of client funds, so they would use a brokerage (in our firm it is Schwab) for his. Schwab has institutional client services as well as retail services, and they operate largely independently of each other.

[Klubbie]

I spent a lot of time looking into becoming a financial planner over the last 3 years due to a work situation that was becoming more and more intolerable by the day. Thankfully I found a new position that didn't require me to have to make such a substantial career shift as moving into financial planning would have meant I had to take a substantial paycut.

Ultimately my research changed my perception of financial advisors in some ways. In many ways I agree with the perception here that financial planners overcharge and add little value. That had never been more true when you factor in robo-advisors and the way most advisors get paid (AUM).

There is also a pretty significant subset of advisors looking to change the industry and shift financial planning to be more geared towards things like cash flow management, estate planning, taxes, etc with investment management being a smaller portion of it. There is some talk (depending on who you talk to) of splitting out fee structures - charging a flat fee or retainer fee for non-investment management financial planning services and then a lower AUM fee (.50% or less) for investment management. I dont love retainer fees, but in some ways it's no different than a one time flat fee spread out over 12 months. And it's better than AUM (assuming it's based on services rendered vs asset size which appears to be the case in most situations).

Most of this happening with smaller firms, almost a grass roots type of movement. It's not perfect, but it's a step in the right direction.

There are other niches tied to looking at finances as a tool to live the life you want and then financial planning is tailored around those goals and ideas. To me, this is where the is value in financial planning longer term as robo advisers become more and more commonplace. Legit advisors will have to offer something robo's cant.

I'd check out xyplanningnetwork and Garrett planning network as those seem to be the two organizations that are driving the industry in a direction that is better than it currently is.

One final thought on this. I occasionally listen to Michael Kitces podcast and a few months back he had on a guy who broke off to be a solo advisor who charges a flat fee of $3500 or so a year to do financial planning (including investment management). There is no separate AUM fee. He was bringing in (allegedly) close to 400k in revenue with low overhead costs. This planner was challenging Kitces on the use of AUM as a the primary fee and basically said that firms aren't earning the extra cash flow from AUM, and he also believed that firms are probably wasting money because their profit margins were too low based on the amount of revenue AUM brought in and how little of that was actually making it to profit.

Personally, I think the next 10 to 15 years will see the rise of more advisors like this guy - small shop charging a flat fee for everything - and with more focus on long term/life planning and behavioral.

I may dab my toe in those waters myself down the road myself once I hit my late 40s. But we will see. Either way, in my opinion the financial planning industry is doing some things to move in the right direction. It's not perfect, but it's a good step.

[Jerry1]

My FA is a CFP and RIA. I’m very happy with everything but the fee. That is a clear sign that the industry needs to adjust. I’d be willing to pay a flat fee that was maybe even a bit above average/market for their good service, but the fee will probably cause me to go it alone once I get everything settled and am running on auto pilot.

[38Chevy454]

Great Post OldShooter. You are correct that we forum members do use the terms loosely. Even worse is for less financially savvy folks who join and they are even more confused.


One of the best things we can learn is when to ask for expert help, and being able to define what that expert help needs to be. Not just in our financial lives, but almost all other areas of life have this same dilemma. Many of us on here have done well with self-directed investments, but as Sarah pointed out, and has been discussed on here before, what about those of us with spouses that do not have the interest level? How can we protect them? Old Shooter's post is a good guide to know which type expert help we can advise new forum members, or within our own family.


Thanks Old Shooter for the definitions and discussion points.

[MRG]

Great point. I'll say my perception is much of the industry doesn't want you to understand what's different. I believe the majority is made up by the 1% AUM guys who want you to believe they're looking out for your best interests.

I watched a few folks leave Megacorp to work for a large 1% firm. Most were being escorted away from Megacorp for failure to perform. They used their industry knowledge to get hired on. A couple of them had little maps so they could find their cubes every day; now they help others with their financial future![emoji23]

[Bir48die]

I am in agreement that many here lump all into one pile. Many CFP’s have insurance backgrounds. I used a CFP just before I retired to plan strategy for impending retirement. Then I had to leave due to high costs. Once a direction was set then advice was not needed.

That being said there are quality investment advisors that experts in specific areas .

[bingybear]

This forum (including myself at times) give the financial advisers a bad rap. I have an aging relative that uses one of the more expensive financial advising firms. They have used the same group for decades. If I took it over an the market went down it would be my fault. They trust these people. They are not really bad at what they do with the exception of their fee and tax management. Paying a bit more for their piece of mind and less friction is likely worth it in my view.

When I hit the stage where I should not be managing my investments... where will I go? My kids? Financial adviser?

[OldShooter]

Thanks to all for jumping in on this. This is the type of discussion I was hoping to generate. As @38Chevy454 also points out, IMO fuzzy nomenclature and, at times, fuzzy thinking here is a problem for communicating clearly to newcomers and the less sophisticated.

@audreyh1, yes there are many independent shops mostly offering full-spectrum financial advice. Most would like to go AUM, but let's not take this thread there. My personal bias is towards firms that are small enough where a $1M portfolio is a client, not just an annoyance. If you want to explore this, napfa.org is a good place to start. I also like the DFA story and they IMO do quite a good job of screening FAs before allowing them to sell the DFA products. Try here: https://us.dimensional.com/individuals Remember, though, that some firms have hired better web site developers than others and this is not an indication that the firms are better or worse. This is a people business and if you head that way, you need to interview a number of advisors before you decide.

@Sarah in SC thank you for your helpful post. Let me amplify a little on the subject of CFPs. (I have a slide in my investment class titled "The Strange Case of the CFP.") First, getting the designation does require a lot of work and I tell my students that working with a CFP is generally a good thing. But, for example, a CFP is required to have a college degree. Triple major, finance, accounting, and statistics? Pretty good, eh? Vocal music, not so much. I know a young CFP with a vocal music degree and her love is the music. The FA job is not her love. Would I recommend her based on the CFP? No.

Regarding the CFP being a "designation bought from a private company," that is the truth. Granted it is a nonprofit, but the guy running it makes north of $1M in salary. Hence, the moral hazard: The more CFPs there are, the more money the company makes. The stricter the qualification standards, the fewer CFPs there will be.

Re the CFP not being a fiduciary, this is absolutely true. The current “CFP Rules of Conduct” do not mention the standard fiduciary duty of "loyalty" to the customer. There is a reason for this: A Series 7 "Registered Representative" working for a brokerage house is loyal to the house, not to the customer. Had the duty of loyalty been in the Rules, they could not sell CFP certificates to these guys and gals.

I have read that this fall the CFP rules will be revised to be more fiduciary-like, but in the end the CFP is still something bought from the company and the only thing the company can do is to rescind if if the CFP's sins are egregious. No legal teeth, IOW.

Quote:

Originally Posted by MRG Great point. I'll say my perception is much of the industry doesn't want you to understand what's different. I believe the majority is made up by the 1% AUM guys who want you to believe they're looking out for your best interests. ..

@MRG, with apologies I'm going to pick you here a little bit. I think this is a dangerously sweeping statement. First of all I don't know how to determine who is "majority," so I won't go there. But remember that an AUM fee at least somewhat aligns an advisor's interests with those of his/her clients. But it is also true that the non-fiduciary advisors (Eddie Jones, for example ) have a strong tendency to rape and pillage. Even fiduciaries like Morgan Stanley IARs are basically there to collect their fees while doing as little as possible for the individual customers. Did you know that M-S's target profit for their "Wealth Management" business is 25% and recently they have been beating that. So, @MRG, I think you're tarring too many people with the same brush. Many of the small shops are, IMO, truly interested in doing well for their customers.

Sorry this is getting long, but I will tell you a story that applies: I put a $100K test portfolio with a DFA FA shop where I could haggle them down to a 50bps fee. One day, a month or so after we did the deal, Steve D. called me and said "OldShooter, I really feel bad charging you this fee simply to be a gatekeeper to DFA. Isn't there something else I could do for you like looking at your estate plan, your tax or insurance situation, etc." Guys like Steve may not be the majority but IMO there are a lot of them out there.

[Crewer]

I'm sure one of the reasons we do the AUM thing for some of our assets (with a Fiduciary IAR under the Fiduciary RIA and the funds held elsewhere) is my experience with my parent's estate. Their estate was small and a mess. Mostly I blame myself and my brother for not working more closely with my parents on that but then neither DB or I had any spare time what with kids (including special needs), our own businesses, etc. We spent lots of time with the folks, including at doc appts and in hospitals (I can compare hospital systems in 4 states based on tie in them with my mother) but the money thing never seemed to be an issue. They had enough while they lived so I guess it wasn't for them. But it took over 4 years to close the estate and was an eye-opener for me.

I don't want to do that to my kids and I assume my kids will continue to be busy with their own lives. If something happens to us they can make one phone call and then we have things all neat and tidy. We have enough to pay the fee and we get/got estate planning, insurance planning, tax planning, and help with business issues. It's great to have a place to go. So far everyone the firm has recommended or used has been very good and I know from experience with DH's business that it can be hard to find those people.

We have peace of mind that we can be away - out of the country away - 3 - 5 months of the year and nothings gets screwed up. Being away that long and often is also a reason it's nice having our 32 YO son living with us and I know I'm going against the conventional wisdom on that, too. Hey, it works for us and makes us feel better.

[kaudrey]

Quote:

Originally Posted by audreyh1 Thanks for explaining the terms. So there are Registered Investment Advisor companies out there and they are not brokerages, but independent firms that may use a brokerage?

Sure, my husband was part owner of one until he retired in December. They advised clients and gave them advise and invested for them, all at Fidelity.