We’ve had the same question from a few clients recently: “Are you a fiduciary?” The answer is YES, but there’s more to it! We’re chatting today about fiduciaries, and what it means to be fee-only or fee-based.
Want to chat more? We’re always here!
What is a Fiduciary? Video Transcript
MIKE
All right
JENNIFER
Ready?
MIKE
Yeah. Welcome. We are on Facebook live. I have no idea what number this is. I think we’ve done I don’t know, like 12?
JENNIFER
Maybe
MIKE
Eleven or twelve.
JENNIFER
Something like that
MIKE
So, we started this Facebook live back in September, so if this is the first of those you’ve seen, this is something that we started.
JENNIFER
Yeah.
MIKE
I say back in September, but a year ago September.
JENNIFER
It was a year ago. Yeah.
MIKE
We wanted to do this. At the time, we were pretty consistent with every other week, and we have totally fallen off of that. We haven’t posted one in a couple months I think.
JENNIFER
Yeah. Summer messed us up a bit.
MIKE
Yeah. But we’ve got some more topics that we’d like to talk about. We do enjoy doing the videos, so we are going to continue to do those.
JENNIFER
We’re not quitting.
MIKE
Yeah, we’re not quitting. We don’t know how consistent they’ll be going forward, but we wanted to put another one out there and this one is on what topic?
JENNIFER
On fiduciary. We’ve had a lot of prospect meetings this week. I guess they come in, but some have been phone calls, and there’s been one question that has come up very consistently this week and other weeks too, but it’s just really hit us this week because we had like three phone calls in one day, and in every phone call was, “Are you a fiduciary?” Which has a lot of interesting nuances to it.
MIKE
Yeah.
Are you a fiduciary?
JENNIFER
So, we have a very blanket answer, “Yes,” but there’s more to it than that.
MIKE
Yeah. And just the question alone, it’s encouraging that people are doing research. There’s lots of places you can go, and one of the people we were talking to actually pulled out the sheet and she said, “I found this on this website and these are the questions I’m supposed to ask a financial advisor.”
JENNIFER
Yeah. It was good.
MIKE
Which is great. You should definitely ask those questions and we are happy to answer those. We would like to see that somebody has done that research, but that one is one that we often we hear somebody asking and you can sometimes kind of tell that they don’t even really know what it is they’re asking or why they’re asking it.
JENNIFER
They just know they should ask it.
MIKE
They just know that they should ask, and they know that they should be working with a fiduciary.
JENNIFER
And that’s half the battle.
MIKE
Right. So, I want to start.
What is a fiduciary?
MIKE
I wrote up the definition of a fiduciary according to investopedia.com, and that’s a site that if you’ve done any kind of just googling on financial topics, that’s likely one that you’ve stumbled across.
JENNIFER
It comes up a lot. It really does.
MIKE
And they’ve got great information on there. I’ve learned some things on Investopedia. So, the definition here is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. In other words, a fiduciary is required both legally and ethically to act in the other’s best interest.
JENNIFER
Yes.
MIKE
So, that’s the definition
JENNIFER
It’s pretty weighty when you hear the true definition of it.
MIKE
Right. Yeah.
JENNIFER
It’s our legal and moral responsibility to always do what we believe is in the best interest of a client, and the client believes too. It’s really not just a judgment call. It’s often pretty clear what is in their best interest.
MIKE
Yep. Now, one thing that I think we talked about and kind of wanted to clarify in this video is, as great of a question as that is, we think that you could phrase that a little bit differently to get a much more enlightening answer I guess we’ll say. And the reason that we say that is because a fiduciary, that definition of a fiduciary, is actually much more broad than I think we’d like it to be. It sounds like a like a great thing, kind of a box to check with the advisor that you’re talking to, “Are you a fiduciary?” But in reality, there’s lots of people out there that that can have what would classify as a conflict of interest, right?
JENNIFER
Right.
Can a fiduciary have conflicts of interest?
MIKE
And that would be that would be like, what are some examples of conflicts of interest?
JENNIFER
In our seat or in other –
MIKE
In anybody that they come across.
JENNIFER
The one I think of the most often is if you’re buying an insurance product, is it the best insurance product for you or is it the best commission for the advisor? Another one could be if someone is investing you in mutual funds, are they giving you a cost-effective, well-diversified mutual fund or are they doing a mutual fund that will pay them an upfront commission and then back end commissions over time?
MIKE
Yeah.
JENNIFER
I’m not saying it’s always wrong to buy what might be a great commission for somebody, but it’s harder to be clear whether it’s in your best interest when there’s that potential conflict of interest.
MIKE
Yeah. And unfortunately, the question of “Are you a fiduciary?” Doesn’t answer that.
JENNIFER
It does not.
MIKE
Because the people that are offering products that have a commission tied to them can still label themselves as a fiduciary. And really what they’re required to do at that point is really just disclose that “Hey, I’m being paid a commission off of any products that you buy from me.” And I remember doing that as an insurance agent when I was doing that years ago, is to make sure to express that, “Listen, these are the products that I think are in your best interest.” And I believed that at the time. You know, I truly felt that I was doing what was right for my clients, but I also had the disclosure that I’m being paid a commission based off of the product that you buy.
JENNIFER
Right.
MIKE
And it differs, you know, depending on what product you choose.
JENNIFER
Yeah. And I think that what feeds into this is fee-only versus not.
MIKE
Right. Yeah.
Fee-Only vs. Fee-Based Advisors
JENNIFER
And there’s some nuances to that. We even have people label us as fee-based, which is very different than fee only. So, if you’re a fee-only registered investment advisory firm, you are by law a fiduciary. We have we have a legal responsibility to act in our clients’ best interest. A fee-based advisor also has the ability to earn commissions.
MIKE
Also fiduciaries.
JENNIFER
They can be fiduciaries, but also there’s some muddy waters in there.
MIKE
Yeah.
JENNIFER
And I’ve seen hybrids of stuff and new clients’ accounts that they’ve gotten from an advisor who’s fee-based, where they’re paying for the assets to be managed but they also have some things in there that they paid a commission on, which can be fine, as long as they really know what they’re what they’re accepting when they sign on the dotted line, so to speak.
MIKE
Yeah.
JENNIFER
And so really the only way to truly engage with someone who’s truly a fiduciary is to be fee-only and to be a registered investment advisor and so that’s really where you’re sort of not that we have zero conflicts of interest. But I can only think of one. Every time someone asks me this question, what would be our conflict of interest? Because we’re only paid by clients, they can always see what that fee is, they can see the calculation, they know exactly what they’re paying and why.
MIKE
Yeah. And in that definition too, the way Jennifer’s describing it, is that the fee-only versus fee-based from a financial advisor standpoint.
How do I know if my financial advisor has a conflict of interest?
MIKE
But you can simplify that question, as a consumer when talking to an advisor, is just asking point blank, “Can you describe to me all the ways that you’re paid?”
JENNIFER
Yeah that would do it. Yeah.
MIKE
Just, “How are you paid? If I sign up, what are the ways that you actually receive revenue?”
JENNIFER
Right.
MIKE
And they’re required to disclose that.
JENNIFER
They are.
MIKE
So, if there’s any kind of commission tied or any possible commissions tied, they have to disclose that.
JENNIFER
The somewhat painful but best way is to read their form ADV part two, which sounds like barrel of monkeys of fun, which it kind of is, but it’s the disclosure. It’s the regulatory disclosure, and they have to disclose everything in there. So, like ours has our fee schedule laid out and it’s very clear that there’s no other methods that we get paid. The only example I can think of is if someone were talking about this earlier is if someone says, “Hey, I think I want to take $250,000 out of my account and pay off my mortgage.” That’s the only potential conflict of interest that I can think of for us.
MIKE
For us.
JENNIFER
As fee only fiduciary advisors, because we’re so dependent on planning as well and that’s such a huge part of what we do, and we’re projecting forward and seeing what best suits your future, and then we just frame the decision for the client that way. We’re sort of pro no mortgage if you can help it.
MIKE
Yeah.
JENNIFER
It’s sort of not really a problem for us.
MIKE
Hopefully the advice that clients get I think adds credibility to our claim to be fiduciaries and acting in their best interests.
JENNIFER.
Yeah
MIKE
Because I think more often than not the answer is if you can pay off the mortgage, especially when somebody’s entering retirement. Early in life it’s not as important but entering retirement to have that mortgage paid off. And that’s not always mathematically the best solution.
JENNIFER
True. Yeah.
MIKE
But mentally and emotionally, that’s often the right decision for certain clients because of who they are.
JENNIFER
Yes one of the most fun I’ve had in recent months was a client who we figured out a way to roll over some Roth 401k money into an established Roth IRA so they could pull it all out tax-free and pay off their mortgage. It was so fun because it took us a while to kind of put all those pieces in place.
MIKE
Moving parts. Yeah.
JENNIFER
But it was so exciting because they had this beautiful new home.
MIKE
And it was paid off.
JENNIFER
And now it’s paid off. Yeah. It was fun.
MIKE
Yeah. So, I’m going to add a little twist to this.
JENNIFER
Uh-oh. You know I have no idea what he’s going to say, right?
MIKE
Yeah this is off the cuff. Because there is a way to eliminate that conflict of interest as well and that doesn’t fit our business model and what we do. Because there are advisors out there that are fee-only financial advisors that only charge a set rate for their services. And the reason that that becomes a conflict of interest for us is because we charge based on the assets that we’re managing.
JENNIFER
Right.
MIKE
So, if a client has $200,000 in an account that is available to pay off a mortgage, if we pay off the mortgage for that, that reduces our fee, and our revenue goes down. So, revenue speaking only, it’s not in our best interest to have the client pay that off, versus an advisor that that you may be working with that you’re paying a flat fee, and they come to you and say “I’ll put together a financial plan for you and give you all this advice and I’m going to charge you.” I mean it could be –
JENNIFER
Usually a net worth.
MIKE
Yeah. That value can be anywhere from $500 to over $10,000. It’s a very wide range of what those advisors charge for that. And in that case, the advice to pay off your mortgage doesn’t change that advisor’s revenue.
JENNIFER
True yeah
MIKE
So just with that information out there, explain why we don’t do that. What’s the biggest reason that that’s not our business model? You used to be that way when you started Summit, was project-based.
Financial Advisor – Project-based or Ongoing Relationship?
JENNIFER
Yeah. Project-based, and there were lots of reasons. The biggest was people often have to implement our advice in that scenario. So, you put together a financial plan for them and you say, “This is how much you should be saving, and this is how you should invest it,” and you know, you tell them exactly what funds to buy and everything, and more times than I would like, people didn’t implement the advice.
MIKE
Yeah.
JENNIFER
And they would come back to me a year later and we’d do a new project, and they would have either never done it, just done it right before we met, or had implemented the advice and then made changes to it.
MIKE
And then deviated. Yep.
JENNIFER
And so, they weren’t really benefiting from the plan, and it’s very time intensive on our side. And it got to the point where we really wanted to dedicate our time to the people who were really more dedicated to the relationship on an ongoing basis. The other thing is, and we were talking about this that just a couple days ago with a prospect, was we’re doing this full-time and so sometimes there are opportunities that you need to move pretty quickly on. And the most recent example I would say was march of 2020 when the markets were down big time, like 40 percent, because of the covid fallout and people were afraid. We didn’t know what was going to happen, the economy was going to shut down for two weeks, you know kind of thing, and the markets plunged. And so, we were looking at it and saying, “Wow, the market’s down as much as it was at the depth of the financial crisis. Is this really could it go much lower?” Yes, it could have. Would it stay down for a while? Yes, it could have. But we looked at it as a buying opportunity knowing it might take a year for the markets to recover, but we probably bought in close to the bottom. Now I’m not saying we took an account from 100% cash to 100% equities, it’s just that people that were supposed to have 60% equity suddenly had about 50&.
MIKE
Yeah.
JENNIFER
And so, we sold bonds and bought stocks.
MIKE
Yeah. We rebalanced.
JENNIFER
We rebalanced into the into the correction, and then when things took off again, it really did add to returns for people. So, there’s no magic to it. It’s just being able to react and pivot and move.
MIKE
And we can do that because of an ongoing active relationship.
JENNIFER
We had the ability to actually go into their accounts and make it happen for them. They didn’t even have to talk to us for it to happen, right?
MIKE
So, the other the other business model would have would have required you calling all however many tens of clients.
JENNIFER
Yeah we couldn’t have done it. It would have taken weeks. Yeah it was funny too. I had covid at the time.
MIKE
Yeah.
JENNIFER
So, we were all working from home, right? I’m sitting on my back porch.it was not pretty, but it was fun because we were doing it all. It was exciting. Yeah. So, it was good.
Financial Advisors for DIY Investors
MIKE
So, there are definitely consumers out there, and you may be one watching this video that is a very do-it-yourself oriented individual, and that may be a better business model for you. If it’s, you know, working with an advisor or somebody that you want to get a general plan that you’re willing to act on yourself going forward, they’re definitely — I like the analogy or the comparison of like a contractor and building a house is to have plans put together somebody to design a house and to put all that together, but then you’re going to take it and actually build the house. There’s not too many people that will do that. Not too many people that a contractor would recommend that you do that, but some people are very capable of that and then they’re okay hiring the subcontractors and getting all that work done themselves.
JENNIFER
They are. And so, I do think that’s a good alternative for those who don’t. But they’re hourly fee-only advisors. They’re still fee-only fiduciary advisors that will do that for you. And I have seen sometimes in the more commissioned land the fee-based area, they’ll offer a free plan. And they’re not nearly as detailed and I mean don’t get into the weeds like we do not as specialized for each individual. But yeah, there’s lots of choices out there it’s really finding what’s the best for you.
MIKE
Yeah. I would be cautious just in that terminology, and I have a couple of pros and cons of working with the fee-only advisor that we’ll get into, but what you just said there is I remember working as an insurance agent, that I provided free plans to people, because I wasn’t paid from my clients, I was paid the commission on the products that they bought, so I was happy to do a financial plan because my goal was to get you to purchase the products that I think make sense for you.
JENNIFER
Right.
MIKE
So, just be cautious of that as well, you know, that somebody that’s offering free planning, it’s maybe because they’re not billing you directly for the plan, but they’re getting paid somehow. So, find out where the revenue is coming from.
JENNIFER
Yeah. With the financial planning tool that we use, which I know we both have a long history with, it was a little discouraging when they built a module and that really appeared to be to helping insurance agents sell more insurance. So, there’s definitely a bent towards that out there.
Pros and Cons of Working with a Fee-Only Advisor
MIKE
Yeah. So now, pros and cons of working with a fee-only advisor. I saw this on another list, and I thought it was good. Number one on the pro side is unbiased advice. I think you truly are getting unbiased advice, where there’s no motivation for any of the advice that’s being given.
JENNIFER
Right.
MIKE
I think we’ve talked a good bit about that. But number two as a con is that it doesn’t necessarily mean that it’s flawless advice. Things can still get missed.
JENNIFER
That’s true.
MIKE
You know as fee-only financial advisors, we truly believe that we’re acting in our clients’ best interest. I think our clients believe the same thing about us, but there’s definitely things that we miss, that we don’t know.
JENNIFER
Yeah. We’re always learning, for sure. Yeah I think we’ve got the lion’s share covered, and then we just keep learning nuances.
MIKE
Yeah. There’s different things, even things that you learn going forward. And there’s things that we’ve brought up with clients, even new tools. We have a new tool that we implemented with the tax tool recently. We haven’t always had that.
JENNIFER
Super cool.
MIKE
And that has brought along some advice that maybe other clients have not gotten in the past because we just didn’t have those resources.
JENNIFER
Right. That’s a great example.
MIKE
Yeah. It’s not always flawless and there are always things that you could probably do better than what you’re doing now, and hopefully we can uncover that.
JENNIFER
Yeah. That’s what we strive to do, get better all the time.
MIKE
The second one is costs are predictable. So that’s a pro when working with a fee-only advisor. You know exactly what they’re being paid and what fees are associated to what you’re paying. The next one as a con is that costs are much more visible, which is a good thing, because you know what you’re being paid, but can be a difficult thing because when you’re buying a product that somebody’s getting a commission, on those fees are very hidden in that product that you’re buying. That commission going to the salesman or the salesperson is coming out of the money that you’re paying. Oftentimes, the commission that they’re paid is years’ worth of the fee that you’re paying for that product.
JENNIFER
Yeah
MIKE
So, as an odd example, when you buy an insurance product and you’re paying a hundred dollars a month for that, the commission to the advisor for that or the agent for that is much more than a hundred dollars. So, just knowing that that fee is coming out of the money that you’re paying that company. They can’t afford to pay those agents, except for what you’re paying.
JENNIFER
Right.
MIKE
So, it’s much more hidden, but at the same time it seems like less because in your mind, my hundred dollars is going right to the product, to the insurance product.
JENNIFER
And that’s why they have those long surrender periods. They might need to keep that money in place long enough to earn back from you what they just paid the agent.
MIKE
Right. And another in that same vein is they’re more visible and they can also be more expensive too. A fee-only advisor can be more expensive than commission products or working I guess outside of that fee-only realm. And basically, the big reason for that is because we have a certain dollar amount a minimum essentially that that we need to make for it to be profitable to work with clients. Because of that we don’t have too many clients that are in their, you know, very beginning careers, that are making you know entry-level salaries.
JENNIFER
It just doesn’t make sense for them to pay.
MIKE
It just doesn’t make sense. Yeah. Because when you look at our fee compared to what they’ve saved or what they’re earning, it’s proportionately maybe more than what makes sense for them.
JENNIFER
For sure. Yeah.
MIKE
The last two I think we’ve kind of covered. But one, comprehensive planning. You’ll typically get that with a fee-only advisor. When they’re giving advice on investment choices or decisions, there’s oftentimes a comprehensive plan is going to come with that. And there’s really no other way to give that kind of advice except to actually know what’s going on.
JENNIFER
For sure. Definitely. I think that’s something that’s kind of evolved with the industry. It used to be someone the fee-only advisors really just managed money. In the last 20 years, it’s become more and more planning as part of that, which really is where a lot of the value is, because it’s really something you can’t really get anywhere else. There’s lots of online tools that you can use without professional help, but all the variables aren’t properly represented in there. And so, it’s pretty cool that we can do that with people.
MIKE
Yep. Agreed. And the last one that I’ll say is a con to what we do is that we are not experts in everything. There’s lots of areas that we do not have the expertise, and we keep bringing up the commission agents around insurance products. There is a fit for insurance products in lots of people’s lives, and we are not the experts on that. You know, we have a lot of knowledge but there are things in particular like annuities and life insurance products that that we don’t focus on that. And there’s a lot of those little nuances that oftentimes we need to point clients somewhere else.
JENNIFER
We do. Yeah for that portion. I mean the financial planning tools, we can say you do need this amount of coverage, insurance coverage, and we’ll help we’ll walk alongside you while you purchase it we just don’t sell it.
MIKE
Right.
JENNIFER
And then some of these annuity products and stuff are mind numbing details. But yes, I choose not to become an expert in that.
MIKE
Yes.
JENNIFER
So, hopefully this helps a little bit. It’s really encouraging that so many people are asking about fiduciaries and becoming more and more aware of fee-only, because it really is sort of new.
MIKE
Yeah.
JENNIFER
Even though it’s been around 25 years, it just slowly gets more and more visibility, but most of the general public just thinks that investment people are brokers.
MIKE
Yeah.
JENNIFER
So, they aren’t really aware of the options available to them.
MIKE
Yeah. So, key takeaway is continue asking the question but rephrase it as, “How are you paid? “And not just, “Are you a fiduciary?” Because lots of people can say yes to that. You’ll get more information if you ask exactly how they’re paid. And I’d say shop around. Get that information from everybody, us included. We love when somebody comes in and it says, “Okay, you’re the third advisor we’ve talked to,” or “I’ve got a couple more that I want to talk to first.” It makes us feel even better when they choose to come with us too.
JENNIFER
But it is good because it’s such a trust, deep relationship and it really is important to have someone you’re comfortable with and that’s a fit for you. But yes, it is awesome when they choose us.
MIKE
Yeah.
JENNIFER
Well, thanks for joining us. We’re back, and hopefully in force, until the holidays derail us.
MIKE
Yes. yeah. So, thanks everybody for tuning in.
JENNIFER
Yeah, thanks! Bye.
MIKE
Bye.
