Is Your Financial Planner Acting in Your Best Interest? Not Necessarily

On September 5, 2007, as the president of the Financial Planning Association, I testified before the U.S. Senate Special Committee on Aging. The subject was “Advising Seniors About Their Money: Who’s Qualified—and Who’s Not?” I testified on unscrupulous sales tactics that destroyed the retirement of seniors.

When asked what I felt could protect citizens in similar situations, my response was that all individuals working with a person’s finances should be held to a fiduciary standard. That was the result of a task force I sat on where we identified the elements of care that a financial planner should be held accountable to.

Why should you care?

Spending 30 years in retirement is why. While it amazes me how little time people spend planning their retirement, I can somewhat understand why. Many do it alone because they fear being taken advantage of, but the problem with that is that retirement planning is a complex process. It brings together investments, insurance, taxes, cash flow, longevity, and more. Why would one want to chance that without competent and ethical assistance?

Effective June 9, 2017, the Department of Labor put into place the fiduciary rule requiring financial advisers (including brokers), insurance agents and others to follow rules that put the clients’ interests first regarding their qualified retirement plans (401k) and IRA accounts. (Be aware that most 403(b) and 457 plans available to teachers and government workers are not currently included in this rule.)

There are many gaps, including the possibility that this fiduciary rule could be rescinded, but for the time being, they are required to treat you with the same standard of care that you have received from your lawyer or doctor. It unfortunately does not cover your accounts outside of specific (not all) retirement accounts.

What is surprising to most people is that all advisers have not already been held to this standard. In fact, evidence from several surveys of consumers reveal that:

• The majority of individual investors (customers or clients) do not understand the distinctions between registered representatives, investment advisers and financial planners.
• The majority of individual investors do not understand the distinctions in legal responsibilities that different financial services providers may have with respect to their customer or client.
• Most investors do not understand the concept of “fiduciary duty,” although they do desire that the same investor protection rules apply to them when they receive the same financial services.

Five Big Questions to Answer:

Question #1: What type of plan are you receiving?

With your entire financial future (and you and your family’s goals and dreams) at risk, are you better served with just investment advice or a comprehensive financial plan? I would suggest you are better served by a plan that includes your retirement, college, investment, insurance, tax and estate planning in one connected (integrated) plan, with an advisor who must serve your interests first.

Question #2: What are the financial professional’s qualifications?

You would be well-served to review the education and professional certifications of any individual you might work with. According to a 2023 Kiplinger article, 245 designations were listed on the FINRA website. Some require that an individual only pay a fee for it. When your financial security depends on it, you would be well-advised to do your homework first.

One of the most widely accepted certifications is the Certified Financial Planner™ designation. CFP® professionals have met the well-established and rigorous education, examination, experience and ethical requirements of the CFP certification process. While the lack of a designation, or one that is not as rigorous as the Certified Financial Planner™ designation, should not be an immediate disqualification, it should make you question whether such an advisor is an appropriate choice for your needs.

Question #3: How are they being compensated?

Ask your adviser how they will be compensated. Fees, commissions, or a combination of the two? Are they paying anyone for your referral to them? It is important you know before you start the relationship.

Question #4: Does your advisor follow the Standard of Care?

It is essential to know for whom the advisor (insurance, investment, or financial planner) works. A fiduciary works for the client and must represent the client’s interests first. They should follow the general guidelines of the Standard of Care. Someone who is paid solely on commissions is a representative of the company they work for and needs only to recommend products that are “suitable”. That means they are not required to put your interests first.  The truth is, they cannot. That is not necessarily a bad thing, but it is important for you to know. Because they are not required to place your interests first, it requires greater scrutiny on your part as to conflicts of interest between you and them. While there may be other exceptions, one I am aware of is if they are a CFP® professional, they are required to act as a fiduciary when providing financial advice.

Question #5: Will they put that in writing?

They should be willing to confirm in writing that they serve in a fiduciary capacity. If not, you will know that they do not act as a fiduciary and can proceed accordingly.

Information and confirmation are powerful. It is your life, and you should know with whom you are working.

Should you have any questions or suggestions for areas you would like addressed, please free to email me at nnicolette@sterlingadvice.com.

Nicholas A. Nicolette, CFP® is one of the founders of Sterling Financial Planning, Inc., which started in Sparta 34 years ago.  A CFP® professional since 1984, he has presented on Financial Planning topics throughout the world. Nick served as the 2007 President of the Financial Planning Association. In that capacity, he testified before the Special Committee on Aging in the U.S. Senate on the protection of seniors regarding their money. In 2011, he received the Heart of Financial Planning Award from both the National FPA and FPA-New Jersey. www.sterlingadvice.com