Comprehensive Advice: Beyond Investments and Life Insurance
Your financial adviser is one of the most important professional relationship in your life. Money touches nearly every aspect of your life, and the complexity of money management can be mind-boggling. Numerous academic studies have demonstrated the value of comprehensive advice, but also showcase how non-comprehensive advice may offer little to no benefit to the client.
Vanguard publishes an annual study called Advisor Alpha which seeks to quantify the value an advisor can offer a client. In the research, Vanguard finds that comprehensive advisers add around 3% greater return after paying the typical 1% advisory fee on a million dollar account. While this may make it seem like hiring any adviser is a no-brainer, about half of that return was tied to behavioral coaching rather than investment selection and management.
Texas Tech Research
Another study from Texas Tech University, titled Planning for Retirement, demonstrated using a comprehensive financial planner more than doubled the family’s average retirement wealth when compared to the average family, but non-comprehensive advisors barely added ten percent (10%). The study’s abstract stated “Results suggest that planning, particularly with the help of a comprehensive advisor, improves retirement outcomes.”
What Comprehensive Means
Truly comprehensive financial planning will go beyond investment management and life insurance to include every aspect of your financial life. Comprehensive financial planning integrates investment planning with estate planning, tax planning, risk management, education funding, cash management, employee benefits selection, debt management, and every other aspect of your financial life.
Retirement Planning Example: Typical vs. Comprehensive Advice
Retirement planning is what most people think of when they think of financial planning and the aspect which is most often featured in advertising. Typical advisers’ retirement planning service will include rolling over investments from 401(k) accounts to IRA accounts, selecting investments, managing those investments over time (hopefully including rebalancing), and providing a sustainable withdrawal strategy in retirement.
Comprehensive advice would include the above, but would add strategies around optimizing multi-decade tax planning, providing greater income earlier in retirement when you can enjoy it more, maximizing Social Security and minimizing Medicare costs through claiming strategies. Social Security is a good example where comprehensive advice can add significant value. There are over 700 different ways to claim Social Security. Determining which is optimal for a client can mean hundreds of thousands of dollars in extra Social Security lifetime benefits between the optimal strategy and the typical advice for both to wait until 70.
Adviser as Multi Level Marketer
Sadly many advisers don’t offer comprehensive financial planning, and some advisers don’t have enough training to understand the world of financial planning beyond the products they sell.
One of the most egregious examples of the problems with the financial services industry is the way in which some firms recruit and train their advisory staff. In these firms, a wide net is cast to recruit as many people as possible to work for the firm as advisers. (Since the licenses don’t require a degree, the net can be pretty wide). These new advisers are then given training on how to pass the licensing exams to be able to legally sell insurance or mutual fund products. The advisers are then given additional training on how to sell the products. In total, a few weeks of training have been taken. And thus ends the ‘extensive’ training of the advisers.
I’ve had numerous students ask me about firms like these, because they went into a meeting as a potential customer of the advice, and left with a job offer and a contract for an annuity. One student told me the adviser’s pitch to join the firm was that all she had to do was watch a web video and take a test and she could start helping people with retirement as an adviser. This scared her since she knew nothing about retirement planning.
While all firms aren’t as aggressive, a surprising number of firms use this ‘burn and churn’ model for their employees. They hire as many people as they can, get them to burn through selling products to their family and friends, and then the people churn out of the advice industry because they don’t truly have the skills to attract non-related clients.
A true adviser will have devoted years to the profession in education and training before they ever give a word of advice. And they will be pursuing advanced degrees and advanced professional certifications, if they haven’t already attained them.
Alphabet Soup: Finance Designations from the Impressive to the Absurd
The financial advice industry seemingly is focused on trying to confuse and impress the public with a ridiculous number of letter combinations advisers can get to put after their names on business cards, corporate bios, and marketing materials. How else can you explain the nearly 200 different designations listed on the industry regulator’s website. While some designations like the CFP, CPA, and CFA actually do mean the adviser has demonstrated some significant minimum standard of expertise, the majority of the designations listed are nothing more than marketing gimmicks designed to make consumers believe the adviser has an expertise they may not have.
Many designations have very simple requirements such as a short self study course and passing a 50 question exam. Some are even easier to attain, such as holding a degree and paying the certification body an annual fee to use their letters. The Masters of Financial Planning (MFP), for example, requires their certificants to have a degree in a related field and pay the conferring body an annual fee. No other educational requirement or exam is required to use the letters. Sadly, most of the 200 designations offer limited assurance to clients that the adviser is actually skilled.
You should look for an adviser who has one of the following designations or educational backgrounds. Professional advisers will pursue designation with rigorous requirements, including education and passing of a difficult exam. Just as you wouldn’t want to see a doctor who hasn’t passed the medical boards or use a lawyer who hasn’t passed the bar exam; you shouldn’t work with an adviser who isn’t serious enough about the profession to pursue one of the better-recognized designations.
The CFP designation is considered the gold-standard for financial planner and is the most well known financial planning designation. To acquire the CFP an adviser must hold a bachelor’s degree, complete 8 graduate-level courses with an approved education provider, pass a comprehensive 6-hour exam (with a 60% pass-rate), attain 6,000 hours of experience, complete ongoing continuing education, and agree to the CFP Board’s code of ethics.
The CFP education and exam cover a broad range of topics in financial planning including investments, retirement planning, economics, tax planning, education funding, risk management & insurance, employee benefits, estate planning, and more. The broad knowledge base ensures clients receive advice from a professional who has demonstrated a minimum level of competency in the major factors impacting their financial life.
A Masters of Business Administration is a graduate degree which covers general business concepts including economics and finance. While those with an MBA don’t have the detailed financial-planning background someone with a CFP designation has, they are likely to have acquired the basic tools during their schooling to be able to provide competent advice.
Financial Planning Degree
Many of the education providers of the CFP designation also offer bachelor’s degrees in financial planning, which offer a similar breadth of Those with these degrees may be on their way to attaining the CFP designation but may not have passed the CFP exam or have completed the 6,000 hours experience requirement.
Other Valuable Designations
Other designations which can demonstrate an adviser’s skill and commitment to the profession include the CFA, CPA, J.D., ChFC, and PFS designations. While not as comprehensive as the CFP curriculum, they still demonstrate significant expertise by the adviser in the relevant field. Like the CFP, holders of these designations are required to have extensive education, pass a rigorous exam, and keep current with continuing education.
CFA - The Chartered Financial Analyst designation is an investment analysis-focused program which includes a grueling 3-level series of tests. Generally CFA holders are employed by mutual fund companies or other institutions for investment analysis, as the curriculum goes very deep on investments but does not cover the breadth of topics that impact the typical family or business.
CPA & PFS - The Certified Public Accountant designation, and its lesser known brother the Personal Financial Specialists, are conferred by the AICPA. The designation are tax-centric, with the CPA designation being focused exclusively on accounting and taxes. The PFS covers topics generally in line with the topics covered under the CFP.
J.D. - A Juris Doctorate is the degree earned through law school on the way to becoming an attorney. Many attorneys are well versed in estate planning law and tax law, but may not have similar skills in investments, retirement planning, Social Security, and other areas of financial planning.
ChFC & CLU - The Chartered Financial Consultant and Chartered Life Underwriter are insurance-centric designations primarily for people who come to financial planning by way of being an insurance agent. The CLU is devoted nearly exclusively to life insurance while the ChFC looks more comprehensively at financial planning similar to the PFS and the CFP above. Holders of these designations, however, are likely to be insurance-focused planners who earn commissions on the financial products they sell.
A License to Advise or a License to Sell?
Financial advisers also carry licenses which are conferred by government regulators after passing an exam. Unlike a drivers license or a medical license, financial services licenses do not imply a level of skill or expertise by the adviser. Instead, it just means the adviser understands basic concepts and the laws related to what is and isn’t allowed for a person with each license. You should never assume that because a person has a license it means they have any expertise.
SERIES 65 – REGISTERED INVESTMENT ADVISORS
The Series 65 is the license for Registered Investment Advisors (RIAs) and allows an advisor to sell advice but does not allow them to sell financial products on commission. Although it is for RIAs, the license may also be held by stock brokers who run managed accounts and charge on an AUM basis. Those holding only this license can advise on anything within financial services, including products sold on commission like insurance, but they cannot sell the product and collect the commission themselves.
The Series 65 license more closely resembles other professions such as doctors, accountants, and lawyers; who don't make their money through commissioned product-sales. Instead, these professionals and RIAs are paid for their services directly by the clients.
You may also see those with a Series 65 license referred to as Investment Advisor Representatives (IARs). Technically, the advisory firm is the RIA and the advisor employees are IARs--but RIA is often used for both the firm and the people.
COMMISSIONED PRODUCT SALES LICENSES
All other licenses in financial services are sales licenses which allow advisers to sell financial products on commission. Many financial advisers hold the Series 6, 7, 3, and 63 licenses. Historically, financial advice given by those with these licenses was designed primarily to make the sale of the product happen.
COMMISSIONS CAN INFLUENCE ADVICE
This is not to say the advice is bad, but it does not need to be the best advice for the client. Selling commissioned financial products means the advisor can be influenced by the amount of money they will make off of recommending a particular product. For example, an advisor who gets paid a 5% commission off of Financial Product A and 8% off of Product B is likely to see Product B as a better alternative, even if it's just a subconscious bias.
SERIES 6 – INSURANCE & MUTUAL FUND LICENSE
The Series 6 license allows individuals to sell mutual funds, life insurance, and annuities. All three of these products have their place in a financial plan; although the high costs of annuities makes them appropriate only in specific situations. An advisor with only this license will have a very limited options for their advice. Although the Series 6 is often held in conjunction with other licenses, many insurance agents only carry a Series 6 and a state insurance license.
Commissions with these products are often hidden from the client, buried within the disclosure documents and prospectuses. Client's purchase the product through the agent from the insurance company or mutual fund company. The company then takes a portion of the purchase price and sends it back to the agent as a commission. This has the effect of either reducing the money the client actually invests or creating an additional fee if the client wants to sell the investment or both.
SERIES 7 – SECURITIES LICENSE
The Series 7 allows an advisor to sell stocks, bonds, government instruments, options, other securities, and mutual funds. The license allows for most any investment to be sold, except for real estate, commodities, and futures. Sometimes called the stock broker's license, commissions under this license usually look like transaction fees for making the trades. Hidden commissions can also be present, especially from investment banks trying to push new issues of securities. Most people who are stock brokers hold other licenses in addition to the Series 7.
SERIES 3 – COMMODITIES LICENSE
The Series 3 allows an advisor to sell commodity futures contracts. If you ever wanted to make your money off of betting on the future prices of wheat, oil, or other commodities; this is the advisor for you. Be warned though, commodities are considered among the riskiest investments and often have dramatic and quick price swings.
SERIES 63 – STATE LICENSE OF STATE LAW
The Series 63 is a state administered license which combines the Series 6 and the Series 7 subject matter but for state law. The Series 63 will generally be held in conjunction with other licenses.
Each state also licenses the insurance agents within the state to allow them to sell insurance products, again on commission. There is no Series exam for the insurance license because they are regulated by state law rather than federal law.
SERIES 66 – RIA/BROKER COMBO
The Series 66 license is for those who are compensated both on commissions and on client fees. This compensation structure is known as Fee-Based, which means they are able to charge the client directly and they also make commissions. Again, there is nothing wrong with commission-drive advice, but the lack of transparency and the potential for conflict of interest should spur you to have a deeper conversation with your advisor.
The Series 66 can often be held by former stock brokers who are transitioning to RIA work, or by people who have some clients who prefer being charged directly and others who prefer being charged through commissioned products.
When a Fiduciary Doesn’t Have to Be
Another twist is that there are some advisers and companies who are licensed both as Registered Investment Advisers and as brokers or insurance agents. This allows the adviser (and company) to choose when they are giving advice under the fiduciary standard or when they give it under the suitability standard. There is no obligation for them to inform the client which standard they are operating under or when they decide to switch to the lower suitability standard.