Critical Question: Who Taught Your Financial Planner What He Knows?

If you have read my blog long enough, you are likely aware that I have a certain pessimism regarding my own industry. Of course, I have no doubt about the value true comprehensive financial planning can provide to clients, and I’m very proud of the service I supply. Rather, it is the actual terms “financial advisor” or “financial planner” that creates a concern for me.

According to a 2012 study conducted by the U.S. Department of Labor, there are 929,700 U.S. citizens who refer to themselves as financial advisors. However, the sad reality is that 411,500 of these individuals are really just insurance salesman when you examine what they do, and 312,200 are nothing more than stockbrokers who get paid to sell investment products. I believe the term “financial advisor” is used by these individuals to avoid the negative connotations that accompany the more traditional terms of “insurance salesman” and “stockbroker."

I am certainly not contending that there is anything wrong with these professions, but I would argue that individuals in these industries referring to themselves as “financial advisors” or “financial planners” is a bit misleading. At the end of the day, these individuals are very unlikely to conduct any actual planning on behalf of their clients and are likely to focus their efforts simply on selling a product and collecting a commission. Consequently, a consumer utilizing the services of these professionals hoping to benefit from any type of objective financial planning are likely to be disappointed.

So when you meet someone who refers to himself as a financial planner, how can you tell if the person is capable of providing exactly the service you are looking for? A key indicator revolves around where the individual received his education and training.

Jason Zweig of the Wall Street Journal recently provided an excellent example. He obtained two emails a firm called Table Bay Financial Network of San Diego sent out to its trainees. Table Bay specializes in training certified public accountants and financial advisors across the country. The first email offered a Maserati to advisers who sell at least $7.5 million in annuities in 2014 and a BMW, Range Rover or Porsche for at least $6 million in sales. The second email hyped up an index annuity paying a 9% commission.

I’d contend that awarding luxury cars for selling expensive products might incentivize a financial advisor to recommend investments that aren’t in a client’s best interest. Upon further investigation, Mr. Zweig found that the founder of Table Bay had a settlement with the Department of Labor in 2008 costing him $500,000 in which he was permanently barred from serving as a fiduciary to a retirement plan.  Of course, this information can be difficult for a consumer to obtain. As Mr. Zweig writes: “all this is a reminder that when you hire a retirement advisor, don’t just ask what he knows. Ask who taught him what he knows."

Referring back to the 2012 Department of Labor study, of the 929,700 individuals who refer to themselves as a financial planner, only 67,323 (7.2%) are Certified Financial Planners (CFPs). The CFP designation is what I consider to be the gold standard in the education of financial advisors. In addition, only 2,400 (.3%) are members of the National Association of Personal Financial Advisors (NAPFA), which is the nationwide organization for fee-only financial planners.  Fee-only planners never collect a commission on the products they recommend and receive no compensation other than what they obtain directly from their client.  This method of compensation ensures that the advisor always has the client’s best interest in mind.

The CFP Board recently published a clever 30-second commercial driving home the point of making sure your financial planning professional received adequate, ethical training:

As the ad says: “unless they are a CFP pro, you just don’t know.”