You may have heard the term “fiduciary” thrown around during the current financial crisis. Over the past few years, the financial services industry has been plagued with scandals surrounding so called “financial advisors.” People such as Bernie Madoff have certainly tainted the term “financial advisor” by taking advantage of trusting investors and putting their own greed and corruptive practices ahead of the wellbeing of their clients. Recently there has been a lot of talk about the Dodd-Frank law, more commonly known as FinReg, which President Obama signed in July. Designed to protect consumers, this bill is widely considered the most sweeping regulatory overhaul since the Great Depression. But similar to the health care bill, the details in the 848 pages are clear as mud. Buried in the bill is a new requirement that charges the SEC with the task of determining if brokers should be held to a higher “fiduciary duty” standard.
So what does “fiduciary standard” mean? This standard requires investment advisors to act and serve a client’s best interests with the intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment advisory to render advice which was not in the best interest of his or her clients. Currently, brokers are held to a lower standard and must only ensure that the investment they are recommending is “suitable” for the client, but are not required to choose the “best” option. As you can imagine, defining the words “suitable” and “best” is no easy task and there is definitely a lot of grey area. The SEC was given 6 months to conduct a study to determine what new regulations will come into effect.
Contrary to brokers, Registered Investment Advisors are already required to adhere to the fiduciary standard which was laid out in the Investment Advisor Act of 1940. Registered Investment Advisors are individuals or firms that are in the business of giving advice about securities and are registered with the SEC or a state’s securities agency, depending on size of the practice or firm. Our firm is a Registered Investment Advisor currently registered with the SEC.
So now that we have distinguished brokers and unregistered financial advisors from Registered Investment Advisors based on the requirement to adhere to the fiduciary standard, we can further differentiate those RIAs that fall into the “Fee Only” category and the list becomes much smaller. Fee Only advisors are compensated solely by the client and do not receive any compensation that is contingent on the purchase or sale of a financial product (i.e. no commissions). Going with a Fee Only advisor is the best way to eliminate conflicts of interests and should not be confused with fee-based which is commonly used by brokers and denotes they are paid both ways, by fees and commissions. Alder Financial Group has been a Fee Only Registered Investment Advisor since our creation in 1996.
Last month, we joined the National Association of Personal Financial Advisors (NAPFA). We have written in the past about our affiliation with the Certified Financial Planner and Charter Financial Analyst organizations and want to share a little about this organization and our reason for joining.
Created in 1983, the National Association of Personal Financial Advisors is the nation’s leading organization of Fee Only comprehensive financial planning professionals. Many of you are probably familiar with consumer advocate Clark Howard. For those of you not familiar with him, he can be seen on CNN and has a syndicated radio program that provides helpful insight, advice and warnings to consumers on a wide array of issues. Clark consistently recommends seeking a Fee Only financial advisor and has recognized NAPFA as a good resource for choosing an advisor. He has a link to NAPFA.org in the resource section of his website.
You may be wondering what a firm must do in order to join NAPFA. While there are different levels of membership, the top level of membership is a NAPFA Registered Financial Advisor, which is the level we chose to pursue. To become NAPFA registered, a financial advisor must meet certain educational and professional requirements.
First and foremost, a NAPFA Registered Financial Advisor must adhere to the fiduciary standard and must be compensated by Fee Only. From an education standpoint, the advisor must have at a minimum a Bachelor’s degree and have a broad-based education in financial planning. As of January 1, 2010, NAPFA requires the Certified Financial Planner (CFP) credential which both Alan Gaylor and I currently hold. While the CFP Board requires at least 30 hours of continuing education and NAFPA tacks on 30 hours more, requiring a total of 60 hours. The advisor must also have at least 3 years of comprehensive financial planning experience.
Candidates to become a NAPFA Registered Financial Advisor must submit a comprehensive financial plan for peer review. The financial plan must address a number of financial planning issues including income taxes, cash flow, retirement planning, estate planning, investments and risk management.
When Alder Financial Group was created in 1996, we primarily defined ourselves as investment managers. Over several years of experience, we have realized that our clients have come to rely on us for comprehensive advice in many different areas of their financial lives from mortgage refinancing to wills, not just investment management. In fact, their investments serve as the means to achieving their long term personal and financial goals. A comprehensive financial plan serves as a road map for investing and without it the investment process can become directionless and unfocused.
Joining the National Association of Personal Financial Advisors is just another way for us to continue to better serve and demonstrate our commitment to our clients. I hope it gives our clients peace of mind knowing that we will always be their advocate in a world crowded with conflicts of interest and lack of objectivity. Working in our fiduciary capacity, we will continue to hold ourselves to higher standards every chance we get.
