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Reflections on 2009

February 01, 2010

As we get ready to close the door on yet another year, most of us (me included) are probably more than ready to say goodbye to 2009.  The chaos that reigned in the beginning of the year, with the free fall of the stock market, was a vivid reminder of how challenging my job can be and how interesting behavioral finance is.  As the market settled down and climbed back, and we looked for “green shoots” in the economy, we collectively moved from panic to quiet acceptance of our economic realities. 

The financial industry has been center stage in all of this turmoil, and as Washington debates how to reform the big players on Wall Street, leaders from the Certified Financial Planning Board, the National Association of Personal Financial Advisors (NAPFA), and the Financial Planning Association have formed the Financial Planning Coalition and are working hard to ensure that the final version of the Wall Street Reform and Consumer Protection Act of 2009 is truly legislation that protects consumers and makes our profession better.  So in the spirit of the traditional New Year’s resolutions, I’d like to echo the Financial Planning Coalition and suggest a few resolutions for the financial services industry.

Give advice or sell a product, but not both.

There are two standards of care that advisors are held to with regard to their clients; a fiduciary standard and a suitability standard, and the issue of who should have to adhere to a fiduciary standard is being hotly debated.  An advisor held to a fiduciary standard is duty bound to act in the best interest of the client, but the suitability standard simply requires the advisor to make recommendations that are suitable, not necessarily in the clients’ best interests.  Currently, fee-only advisors (who sell advice and no products), Registered Investment Advisors, and Certified Financial Planners™ are considered fiduciaries, while registered representatives and brokers are subject to suitability standards.  At issue is whether or not someone who works for a company selling a product, but also provides personalized advice, should be a fiduciary, or even if he or she can be a fiduciary, given the obligation to the employer.  Theoretically, someone selling a mutual fund required to act as a fiduciary might have to sell you a no load fund without a sales charge, in order to give you the best deal.  That may be in the best interest of the client, but the advisor and his company would not be compensated.  In my opinion, it makes more sense to allow product salespeople to remain under the suitability standard, and clearly disclose that they are not fiduciary advisors, but are in fact selling a product.  You wouldn’t expect a car salesman to steer you to a Honda because it’s better for you if you walked into his Ford showroom, just as you wouldn’t expect your doctor to sell you a prescription drug because she works for the pharmaceutical company.  There is a place for both product sales and advice; let’s just be clear about what we represent so the consumer can know the difference.

The House version of the bill that was recently passed requires brokers who provide personalized advice to be fiduciaries, but a sentence within the bill allows advisors to switch hats; meaning they can advise under a fiduciary hat, and then switch to a suitability hat when selling the product to go with the advice.  They are NOT held to a “continuing duty of care or loyalty.”  Unless they are required to literally change hats mid-meeting or clearly disclose the switch, consumers will have to be very careful to not assume their advisor is acting in a fiduciary capacity.

Give consumers transparency and clarity.

The industry of financial advice is a young profession, and has evolved into a hodgepodge of various occupations all calling themselves advisors or planners, leaving the consumer largely in the dark about what they do and who they represent.  The Coalition is pushing to establish an oversight board that would set standards for competency and ethical standards for those who hold themselves out as financial planners.  While there are many financial planners in practice who are technically competent and ethical, unfortunately, there are also many who were hired because of their sales ability and have no financial background whatsoever.  An oversight board would go a long way in resolving these misrepresentations. 

Give access to financial advice to all.

Especially now, it’s important for advisors to provide an affordable way for people to have access to the advice they need.  We’re told that the way to get rich in this field is to work only with those of high- and ultra-high net worth; a business strategy that I disagree with personally, but also one that leaves a huge part of the population without professional advice.  NAPFA is making progress in that area by sponsoring free advice “Jump Start Your Retirement” days with Kiplinger’s, the Money Bus national tour, and free monthly consumer webinars like the upcoming “Managing your 401(k)” on February 8 (see www.napfa.org for more information).  For me, this column has been part of an overall mission to bring clarity and transparency to personal finances.  My philosophy is that it’s your money, and my job is to help you understand it better and make good choices.  In the past year we’ve looked at life insurance, budgeting, credit card reform, student loans and more.   

Erin Baehr is a Certified Financial Planner™, and the owner of Baehr Family Financial, a fee-only financial planning firm in Shawnee (www.baehrfinancial.com). 

Erin Baehr