A fi-doo-shee-er-ee, or fiduciary in common English, is one of the most important considerations in choosing a financial planner. Don’t believe me? You should, because even entertainment media is catching on to how important it is to pick the right advisor, and what questions to ask to make a good choice. It’s becoming a popular soapbox movement in an effort to inform consumers of the perils of choosing poorly, and the benefits of choosing wisely.  “Save the Whales” has been traded in for “Hug a Fiduciary.”

John Oliver did a great episode focusing on financial planning, including who and what a Fiduciary is. Simply put, it’s a professional that puts their client’s best interests ahead of their own. If you thought that was implied with any advisory relationship, you’re wrong.

The problem is most advisors think that they’re meeting this standard, but have a difficult time proving it due to their compensation structure. For example, was that life insurance product recommended in good faith or because it pays a hefty commission? Let’s face it, life insurance in some form for most people is a good idea. That mortgage isn’t going to pay itself if the breadwinner passes prematurely. But lately it seems like insurance, annuities, referrals and mutual funds are being scrutinized due to the uncertainty behind the advisor’s intentions.

In my 10 years of financial planning, I’ve been apart of offices that sell insurance, annuities, mutual funds, and regularly make professional referrals. In fact, at my last job I was Director of making all these things happen.  To pick on insurance for a moment, we mostly offered term, which has a minimal commission payout, and I would show the client the list of options where we’d recommend they choose the cheapest one. Term is term, there aren’t any bells and whistles to consider that would inspire me to choose one over the other. I’d say that’s a fair way to convey that there isn’t much in it for us and we’re not basing the decision off an increased commission payout.  Despite its good intentions, it doesn’t meet the new fiduciary and/or fee-only standard of advising that the media and Department of Labor is so urgently guiding consumers toward.

What’s being recommended advisors do now (in order for them to say they’re a good guy), again I’m picking on insurance, is to completely outsource the sale, with no kick-back, to someone they trust with low fees.  This makes it crystal clear that there is no bias with regards to the recommendation.

POWWOW outsources its insurance sales to trusted professionals as I wouldn’t want skepticism over the recommendation to prevent a client from moving forward. With that said, just because your current advisor offers insurance it doesn’t make them a crook. Now if they want to convert your portfolio into a whole life policy with a side of annuity, we may have a problem.

Moral of the story

When hunting for an advisor it is best to look for someone holding themselves out as a fiduciary and/or fee-only.  You can feel more confident in recommendations truly being in your best interest.  With this said, you may run into 2 issues.

  • It’s expensive. Without the commissions to pad the bottom line fee-only advisors may charge a higher AUM % on the portfolio. Unlikely you’ll find anything less expensive than 1.25% for a modest portfolio.
  • Many fee-only advisors cater to high net worth families and have minimums. This makes sense as outsourcing sales, etc is natural for a high power family that already has many of their own trusted professionals and connections. The advisor is simply acting as a quarter back and manages the portfolio conservatively to preserve capital.

So what does the average Joe do? They team up with a cost effective investment manager and hire POWWOW for financial planning recommendations that they’d otherwise overpay or not be qualified to receive.

See my post on whether a robo-advisor is right for youQuentara Costa helps the sandwich generation prioritize kids, self, and aging parents. For years Quentara was the primary caregiver for her father who was diagnosed with Alzheimers at the age of 70. Since his passing she’s become a mother of two sweet girls. Professionally she received a master’s degree in Personal Financial Planning from Bentley University and has held the CFP® designation since 2010. Community involvement includes hosting the Merrimack Valley Senior and Caregiver Group and volunteering for Budget Buddies.