PRACTICAL OBSERVATIONS
The Fiduciary Olympics
By Jim Evans
In thinking about practical observations for our patch over the last year, several things come to mind but one particular item—the discussion of how different financial advisors charge for their services—rises to the top of mind from my perspective.
Now I try not to take myself too seriously, so I thought it might be fun with the Olympics coming up to apply the same type of arbitrary scoring system it uses to judge the various types of compensation arrangements used by financial advisors.
We can call this the Fiduciary event; it is a competition to see who (that is which category) is most fiduciary-ee.
Let’s set up the very first Fiduciary Olympics. To begin, if you are a competent financial advisor and wish to render your competent advice to the public it is fair to say that you might want to be compensated—unless you work for a non-profit that distributes advice to the public free of charge. We’ll circle back to this idea later! But if we assume financial advisors want to be compensated for their competent advice, how do we measure what sorts of compensation create the most conflicts? Or put another way, which sorts of compensation make it most difficult to fulfill the fiduciary role? Our event will be judged by the degree of difficulty each type of compensation presents to financial advisors attempting to fulfill their fiduciary duty; let’s assign 1 as the least fiduciary-ee and 5 as the most fiduciary-ee.
Full disclosure: I am not a true believer! I spent many years of my career as a stockbroker. I think I gave good advice. I helped people resolve their financial issues and build wealth. Yes, I was compensated via commissions, but that certainly did not preclude me from rendering good advice. I loved being a stockbroker in the early years but it became clear to me that the regulatory environment and market optics of a commission-based model were going to become much more difficult. That is why I decided to make a change. Also, TTG (my firm), collects most of our compensation via AUM fees.
So, with my background disclosed let’s get this competition started:
| Let’s start with my old position, stockbroker. Now there is no question that accepting commissions creates a conflict. In this position the financial advisor only gets paid if a prospective client accepts their advice. That does not make the advice bad, but it does create a barrier between the best interests of the public and the financial advisor. Throw in potential broker-dealer pressure on the financial advisor to sell certain products to their clientele and it makes achieving the duty of a fiduciary very difficult indeed. Not impossible. I know good stockbrokers to this day. But with apologies to my old colleagues—we will have to give the stockbroker category a 1.1. |  |
| Now I am a simple thinker. Either you are putting the public’s interest ahead of your own interests or you are not. The second category—hybrid stockbrokers who are sometimes fiduciaries and sometimes salesmen—I do not understand. How can you say with a straight face sometimes I am rendering advice that is in your best interest and sometimes I am selling you something. I will let you know which is which at the time. This is just silly. If the public was not confused before they will be now. Just due to confusion alone this category gets a 1. |  |
| It is always fun to criticize others,especially when they are unavailable to defend themselves! But now it is time to move into NAPFA’s realm. Let’s start with Fee-Only RIAs who receive the majority of their compensation via AUM fees. Now if we were to be extra picky we could divide this group between those who manage their client’s money primarily with mutual funds versus individual issues. I am not going to address that issue because I am not very brave. The big conflict here: Are we really doing that much more work for the client who has $10 million versus the client who has $1 million? It is a rhetorical question. Per all of our CRSs, the more assets we gather the more fees we collect. But the fees are clear; they are not transaction based and the relationship is directly with the client. Since I have a high opinion of myself, I am rating this category 4. |  |
| Then there are Fee-Only RIAs who receive the majority of their compensation via flat fees. If you are in this category and are the sort who enjoys playful professional banter aka “trash talking,” you might pound your chest as you stand over your AUM-based brethren and talk about how much fairer a flat fee is since it does not escalate merely because of the AUM. Of course, the AUMer (is that a word?) could respond by playfully asking if their flat fee includes “active” management. But the flat fee-er may have a point; perhaps their compensation method is a little more fiduciary-ee than an AUM model. So, we’ll give the flat fee-ers a slight edge: 4.2. |  |
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We come to those Fee-Only RIAs who receive the majority of their compensation via hourly fees. If anyone has a reason to boast it would seem to be this category. What could be fairer and more fiduciary-ee than simply charging for your time? Of course, the AUMers could bring up active management again and the flat fee-ers could remind their magniloquent brethren that they charge the same regardless of the time involved. And if things really got chippy, everyone could remind the hourlies that they share their compensation methodology with lawyers. Ouch! Still, it does seem like the hourlies make good points, so they earn a lofty 4.5 for being super fiduciary-ee. |
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| There are those Fee-Only advisors who charge both AUMs and either (or both) a planning flat fee or an hourly fee for financial planning. In this case the AUM is to manage assets and the planning fee is for other advice. Now since it would be difficult to explain to the AUMers, flat fee-ers, and hourlies how a financial advisor who charges a full fee for both asset management and planning can be more fiduciary-ee than they are, I am chickening out and assigning this category a 3.9. |  |
| Since we are racing to be the most fiduciary-ee, let me suggest a new category: the not-for-profit financial advisor who provides advice free of charge. They would have to raise money much like other charities— banquets, annoying mailers, reverse raffles—but here we have financial advisors who provide their advice completely without conflict. Well almost. The biggest donors might receive a little more advice than everyone else, thus creating a small dent in an otherwise perfect fiduciary-ee score. The not-for-profit financial advisor gets a 4.9! |  |
And the medals go to ...
Well, there you have it. Not sure what “it” is—but it is all yours.
My point? I think I have one. Everyone likes their own cooking. I think we all are necessarily confident in our approaches to rendering advice, including how we choose to charge for the advice. NAPFA represents a sort of fraternity of financial advisors who wish to provide the most skilled, competent advice to the public. We all charge for this advice and have varying philosophies in this regard but it is hard for me to see how this makes any of us more or less earnest—the results of Fiduciary Olympics notwithstanding!
I hope this article made you smile. I hope it brings a sense of camaraderie and fraternity to all of us. Because regardless of how we charge there is a great need for earnest, competent financial advice.
Disclosure: The ratings contained herein have no mathematical or logical basis. This means they are completely made up! Fiduciary-ee, AUMer, flat-fee-ers, and hourlies are not real words. Any insult to any category of financial advisor is purely satirical. Really, I love everyone—even insurance agents!
Jim Evans has been in the financial services business for 39 years. In October 2006, he co-founded TTG Financial. Jim and his wife Jill live in Northeast Ohio. They have two children and three grandchildren.
image credit: istock.com/xijian