Financial Symmetry News & Views

Posts Tagged ‘Fiduciary’

We in the financial planning community believe that something called a “fiduciary standard” is the very best framework for professionals to work with our clients.  That’s why we’re so angry over something that happened in the Senate over the weekend: Senator Tim Johnson of South Dakota inserted an amendment into the new regulatory reform bill–and, with the casual stroke of a pen, eliminated an important and powerful consumer protection.

This amendment cuts out a part of the original bill that would have required everybody who gives investment advice to the public to act as a fiduciary.  Senator Johnson wants the Senate to “study” the issue instead.

Why should you care?

The fiduciary standard is a legal concept, but its core idea is not complicated.  To act as a fiduciary means we professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work for, and give recommendations that are solely and completely in the best interests of people like you, our customers or clients.

In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you, given what I know about who you are and what you want and need?

So what does it mean NOT to be a fiduciary?  Imagine that there were two kinds of health practitioners in the world.  One group functions much like doctors do today: they work out of independent offices, meet with you, diagnose your ailments, prescribe a medical solution that they believe is the very best course of treatment, and you pay them directly for this service.

The other group of health care providers operates somewhat differently.  They’re employed in the branch office of a large multinational health conglomerate which requires its employees to recommend certain treatments which are most profitable to the company, so long as these treatments are considered to be “suitable.”

These might not be the best treatments, but under a set of very complicated regulations, these less-than-ideal prescriptions are deemed to be legally-defensible ways to address certain medical problems.  These other health care providers are paid by the company according to how many of these treatments they can sell.

Now imagine that these larger companies, because of the very high profits they’re making on these treatments, are able to gain a lot of influence over the process that decides which treatments are “suitable.”  In fact, their executives sit on the governing board of the organization that makes these determinations.

Finally, imagine that something went horribly wrong.  Several of the most popular treatments that these non-fiduciary medical professionals were eagerly peddling to their “patients” were not at all as their companies had portrayed them.  The result: catastrophic consequences, pain and suffering throughout the world.  An enormous mess.

To bring the analogy back to the financial world, these terrible treatments (investments) actually DID bring the global economy to the brink of financial collapse, a mess that required our taxpayer money to fix.  These companies had become so entwined in the system that the government had no choice but to help them recoup the staggering losses they brought upon themselves.

Not surprisingly, an outraged public demanded that this must never happen again.  To the real fiduciary practitioners, the solution is obvious: require everybody to act in the best interests of their customers/clients by imposing a fiduciary standard.  No more shady “suitable” treatments.

We were encouraged when Congress drafted legislation which, among other things, would bring every provider of financial advice under a fiduciary standard.

So here’s why professional financial services providers are angry.  Now that the catastrophic global meltdown, TARP, massive losses in the stock market and the longest recession since the 1930s is beginning to fade from memory, those companies that provide “suitable” non-fiduciary advice have gone back to business as usual–and very quietly, a Senator from South Dakota has now inserted a provision into the reform bill saying that instead of imposing this fiduciary requirement, that instead Congress will “study” the issue.

The Senate has decided to leave fiduciary out of the final bill.  Even the Wall Street Journal is outraged–here’s a link to a strongly-worded column that clearly explains what happened: http://online.wsj.com/article/SB10001424052748703940704575089413832399630.html

And here’s a link to another article which talks about how the legislative process favors the organizations that take the most money out of the pockets of their customers: http://www.financial-planning.com/fp_issues/2010_1/angels-and-demons-2665124-1.html

It would be nice if everybody called their Senator and Congressperson and said that they were just as angry as we are in the professional community.  A groundswell of public opinion might make our elected representatives understand that we haven’t forgotten TARP and all the rest of it.  Right now, the only people lobbying on your behalf are the professionals themselves, and there apparently aren’t enough of us to get the attention of the Congressional representatives who may be looking out for their own interests more than ours.

• This article is written by Bob Veres, publisher of Inside Information.  Inside Information is a journal that keeps financial advisors on the cutting edge of industry news. We found this piece particularly relevant to the heated debate surrounding the fiduciary vs. suitability discussion.

Morgan Stanley Smith Barney is offering as much as 330% of a brokers annual production to join the firm.

Bill Ramsay, CFP®, was recently quoted in the November 2009 Investment Advisor magazine.

In the cover story “Reassessing Risk” by Olivia Mellan, Bill discusses his views on risk tolerance:

“My experience is that many people’s tolerance is directly correlated with recent market performance, so we shy away from questionnaires. I’m also wary of the way people can misjudge odds due to things like familiarity bias or the structure of questions.”

…

“We then discuss with clients how that [performed] under different market conditions, and look for their wince point to gauge whether their tolerance is lower than their capacity. If their tolerance is lower, we’ll lower the max equity exposure.”

Click here to read the entire story on InvestmentAdvisor.com.

Bill Ramsay, CFP®, recently participated in his third Triangle Business Journal roundtable event.  The 2009 Financial Roundtable: Wealth Strategies was held at the Triangle Business Journal office on September 29th, 2009, with the full article appearing in the October 16th, 2009 issue.

Bill also participated in the Triangle Busniess Journal’s rountables on August 23, 2007 and July 18, 2006.

Please contact our office at (919) 851-8200 for a copy of the full article.

Paid subscribers of the Triangle Business Journal may click here to access the full article through their website.

Financial Symmetry Inc. is proud to announce that Will Holt, CPA, has earned the CFP® designation. Congratulations Will!

The following is Will’s recent letter to our clients announcing his achievement.

When I joined Financial Symmetry a little over three years ago, I came in with a broad goal of using my extensive experience in accounting and taxation to help others achieve their financial objectives.  It soon became apparent to me, however, that having the CERTIFIED FINANCIAL PLANNER™ designation would enhance my hard earned skills and allow me to better serve our clients.  I am proud to announce that upon completion of an intensive preparation course and diligent self study, I successfully passed the comprehensive national CFP® exam in July.  In the months following I completed the remaining requirements to earn the CFP® designation and now possess the necessary credentials to move into a primary financial advisor role.

To earn the CERTIFIED FINANCIAL PLANNER™ designation, candidates must complete what the Board of Standards refers to as the “4 E’s”:

• Education
• Examination
• Experience
• Ethics

In addition to earning a bachelor’s degree, completing a board certified education program, passing the exam, and adhering to a strict code of ethics, candidates must also have completed three years of relevant work experience in an industry related field.  As a licensed Certified Public Accountant I was automatically eligible to apply for the CFP® Certification Examination in lieu of the education requirement.  Thirty hours of continuing education every two years is also required in order to maintain an active CFP® license.

Being part of the team here at Financial Symmetry has enabled me to build upon my experience as a partner in a local CPA firm.  Through working on plan development, personalized investment analysis, and implementing strategies in our high-level client service model, I have added the essential knowledge and skills to move into this new role with our firm.  I look forward to the new challenges and responsibilities that this opportunity presents.

For a complimentary initial consultation with Will Holt, CFP®, CPA,  please contact him at (919) 851-8200 ext. 203 or by email at wholt@financialsymmetry.com.

Understanding the difference between a fiduciary standard and a suitability standard could pay major dividends in a relationship with a financial professional.  Operating under the fiduciary standard requires a planner to put the client’s interest ahead of his or her own.  In other words, don’t be afraid to ask your financial advisor the motivation behind his or her recommendations.  Recently, the FPA in a combined effort with NAPFA and the CFP Board have made a big push to have the fiduciary standard applied to securities brokers that give investment advice as well.  In this msn.com article, Liz Pulliam Weston does a nice job breaking down the differences between these two words and lists some questions you might like to ask your advisor.

Can You Trust Your Financial Advisor?

Written by Chad Smith, CFP®.