Starting off …
After I graduated from the University of Illinois at Urbana-Champaign with a Master’s degree in Accounting, I began my career at the Chicago Mercantile Exchange. During that time, I was approached by a number of financial advisors from large asset management companies who wanted to offer me assistance in retirement planning. Although I was only in my early twenties, I figured it was never too soon to start thinking about long-term financial planning. So I would take them up on their offers and meet with them. What I believed I needed at the time was advice, tips from someone I could trust to guide me to the best path toward financial success. Although I already knew that I could save money and I also knew the fundamentals of investing, I really felt I needed the opinion and guidance of an expert I could trust.
These financial discussions usually started out fine, but they soon turned into sales pitches, with the advisors urging me to buy life insurance policies or annuities from their companies. Sometimes these advisors were accompanied by their bosses, people who had impressive corporate titles and who used persuasive language like “protect your future” and “insure your insurability.” I recognized the fear tactics they used to make me think I might miss out if I didn’t buy into their plans. I felt pressure and declined their offers. These experiences left a bad taste in my mouth.
When I later discussed these episodes with Rob, he told me that what I had experienced was a common practice among large firms that are commission-based rather than fee-only. Rob explained how he learned about the fee-only vs. commission-based pay structure of financial planning when he was in college (also at the University of Illinois Urbana-Champaign, but in Finance). He explained that the key difference between commission-based and fee-only planners is the concept of fiduciary, which is a duty that he has for all his clients. As a fee-only financial advisor and a member of NAPFA, Rob has a taken a fiduciary oath to serve in the best interests of his clients. I knew that Rob would always act in the best interest of his clients regardless of having taken an oath or not. However, I had assumed that all other financial advisors had taken the same oath and were held to the same standard as well. I quickly learned that I was incorrect and naive in making that assumption.
Fiduciary or Not?
Fiduciary comes from the Latin root fidere, to trust. A fiduciary is someone who is duty-bound to act on your behalf, in your best interest.
Fiduciary duties include the obligation to act in the best interest of the client. An example: Lawyers must act in the best interest of their client. But are all financial advisors fiduciaries? Not even close. Some firms, such as our firm, Costello Financial Planning Inc., are actually both: fiduciary and financial advisor.
But why are some financial advisors fiduciaries and some are not? Over the past decade, the number of financial planners and financial advisors has grown significantly. Most of these professionals are primarily in the business of generating commissions for themselves based on sales of the financial products promoted by their companies. If an advisor is paid more commission to sell a certain product, there is an inherent conflict of interest for the advisor, whose best interest will be to invest in the higher-commission product. Just as car salespeople attempt to sell more expensive cars with high-margin add-ons, conflicts exist for financial advisors who strive to sell products paying them higher commissions.
A true fee-only advisor, however, assumes the role of a fiduciary and is not allowed to receive compensation through commissions. Instead, fee-only firms charge a specific, agreed-upon fee directly to the client. A fee-only firm will also make it clear that the firm does not take any other form of commission or payment, which removes any conflict of interest from the client-advisor relationship.
Did You Know?
This conflict-free aspect of financial advice is an important factor to consider. The vast majority of the general public believes that an advisor should be obligated to put the interests of the client first. However, too many investors incorrectly believe that such fiduciary duties are already applied to any persons who call themselves financial advisors.
One reason for this misunderstanding may be that for a brief time recently, it looked as though the government was finally going to implement a rule to hold anyone who provided advice on retirement accounts to the fiduciary standard. This was known as the Fiduciary Rule. However, the Fiduciary Rule, which had been passed by the Department of Labor, has since been scrutinized by the companies who thrive on commissions. Unfortunately, the rule was shot down in the U.S. courts, under pressure from these large asset management companies.
And Now, Today . . .
Once Rob had explained to me that just because a person is a financial advisor does not mean that the person is obliged to act on the client’s behalf, it all started making sense to me: why I felt pressure from these advisors, and why things just didn’t seem right. But what I couldn’t understand was why a client would ever choose to work with any financial advisor other than one who had assumed a fiduciary relationship. Why would a client ever choose to work with a financial “advisor” who was acting with an inherent conflict of interest? If there is an option for transparency (both in fees charged and how advisors are compensated), who would choose anything else?
That is why when Rob asked if I was interested in working with him at Costello Financial Planning to assist and advise clients as fiduciaries, in a way that defies the Wall Street model, I immediately accepted. I am thrilled to be working with my brother at Costello Financial Planning today.
I believe that like most relationships, the relationship between a client and a financial advisor should be built on trust if it is to be strong and lasting. How can it be built on anything else? The concept of a fiduciary is so important for our clients, as well as the general public, to understand. The bottom line is that there are advisors who are also fiduciaries, and then there are advisors who are just salespeople. Nobody should work with an advisor without first understanding which type they are dealing with.
If you need help understanding whether you or someone you know is working with a commission-driven advisor rather than a fee-only fiduciary, do not hesitate to reach out to Rob or me for guidance. We are here to help you. Your success and reassurance are in the best interest of both of us.