As registered investment advisors, we are held to a fiduciary standard. The CFP Board’s advertisements to the public now state “CFP Professionals are committed to act in your best interests.” Referring to their clients, a Fisher Investments advertisement states, “As a fiduciary, we always put their interests first.” In theory, the fiduciary standard is quite simple but, like many things in life, theory and reality can be quite different. Let me explain.
First, let me pose a question, the answer to which you don’t share with anyone.
What letter grade would you give yourself in practicing your fiduciary duty to your clients?
Think about it for a couple of minutes. Before reading on, assign yourself a grade ranging from an “F” to an “A+.”
I adapted this question from one that behavioral economist Meir Statman once asked me. Statman, a professor of finance at Santa Clara University, asks people to grade themselves on how ethical they believe they are. If you grade yourself a B+ or lower, you are probably an ethical person, he told me. But if you graded yourself an A- or higher, you aren’t thinking about all of the ethical conflicts we face every day and are more likely to be less ethical. I will confess to driving over the speed limit often. That’s more than unethical – it’s also illegal.
I asked Statman whether the same could be true for financial planners in grading themselves on their exercise of the fiduciary standard. He responded yes. If you didn’t give yourself an A, pat yourself on the back, though you may not want to share your grade with your clients without this context.
Buffett as a benchmark
Are you skeptical? I think of Warren Buffett as perhaps the most ethical person alive in the field of finance. He collects a tiny $100,000 salary for running Berkshire Hathaway, a company with a market cap of $893 billion as of July 10, 2024. I remember a TV interview well over a decade ago where he was asked what made him so ethical. He immediately responded that he wasn’t sure he was more ethical than anyone else, and added something along the lines of he couldn’t be sure that he wouldn’t rob a liquor store if he needed the money to feed his family.
It was Buffett’s awareness of these conflicts of interests and the fact that he had more than enough money that allowed him to act in the best interests of his shareholders. As I recall, he said it was now very easy for him to be ethical.
Admittedly, I didn’t record that interview and wasn’t able to verify my memory of it. But the point is that Warren Buffett is aware of conflicts he faces every day. Whether or not you agree with his position that those who can pay more taxes should, he illustrates putting the interest of other Americans above his own, since this would cost him billions of dollars.
I contrast Warren Buffett with the CFP Board which, for many years, advertised that CFP professionals were held to a higher standard. Yet, for many years I pointed out to the CEO, Kevin Keller, and some members of the board of directors that all of their disciplinary actions came after those of other regulators or law enforcement agencies and that their advertising slogan was false in practice. So they shouldn’t have been surprised when The Wall Steet Journal’s investigation found 6,300 certificants (nearly 10 percent) were shown as having clean records on the CFP Board’s search website but actually had regulatory disclosures. More than 5,000 of those certificants had received customer complaints, and almost 500 had criminal charges. In addition, regulators often falsely tout their enforcement of the fiduciary standard.
Conflicts of interests
Conflicts are everywhere in financial planning. They exist in all fee models, whether they be commissions, assets under management, fixed fee, or hourly. Any time money changes hands there are conflicts of interests.
Examples include:
- Billions of dollars sitting at some brokerage cash accounts earning very little. For many years, Schwab made over 100 percent of its profits from net interest income – paying clients virtually nothing on their cash.
- Creating unnecessarily complicated portfolios. A simple portfolio of a few ultra-low-cost funds clearly bests the vast majority of the funds of complex portfolios, in addition to being far more tax-efficient. Yet many advisors create portfolios with dozens or even hundreds of holdings to make the client more reliant.
- Telling clients not to pay off their mortgage. A mortgage is the inverse of a bond and has no impact on the price a home will eventually be sold for. Often the after-tax mortgage rate is far higher than the after-tax rate the client is earning on the bond or bond fund in their taxable account. This is especially true if the client is also paying investment income tax.
- Recommending only products that fit our fee model. Sometimes a direct CD or bank money market account may yield more and be even safer.
For the record, I think the majority of RIAs strive to live up to the fiduciary standard and navigate the gray areas. I certainly don’t hold myself out as some paragon of virtue who is giving Warren Buffett a run for his money in an ethics contest. He froze his meager salary for over 35 years, while my hourly rate is higher than average. This is clearly more in my best interests than my clients, and lowering it wouldn’t impact my family’s financial security. I can’t defend why I make so much more than Warren Buffett.
I didn’t become an advisor until I completed more than two decades of corporate finance that made my family financially secure. So it was easier for me to select the hourly model than it would have been if my finances were less secure. Without a doubt, if necessary to provide for my family, I absolutely could sell an annuity that paid me a juicy 10 percent commission without any ethical qualms.
What this means
Some advisers may find my perspective on this subject off-putting. I remember sitting next to an advisor at a breakfast meeting who told me she always put her clients first. I happened to know she put huge portions of her client portfolios in private, illiquid REITs that paid her handsome commissions. Predictably, they had horrible results for her clients. I also knew this woman was very nice and did far more charitable work than me; she was a good person. Yet good people will do what they need to in order to make a living.
So ask yourself again, What letter grade would you give yourself in practicing your fiduciary duty to your clients?
Did you change your grade at all? This is one exam I hope you didn’t ace. Whether you did or didn’t, the purpose of this piece was to help you reflect on the conflicts of interests we face every day in financial planning as well as in life in general.
I’ve personally found a high correlation with those touting their fiduciary duty the most with those abusing their clients the most. I tell my clients that they should trust me just enough to listen but not so much that they would follow my advice blindly.
I want financial planning to be viewed as a profession. But false advertising from the CFP Board backfired and likely will again. If we want financial planning to ever be viewed as a profession, we must exercise our fiduciary duty as best we can. We must live up to the standards we claim, which includes being keenly aware of these conflicts.
The theory of fiduciary duty is simple, but practicing it isn’t.
Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisory firm. He has been working in the investment world of corporate finance for over 25 years. Allan has served as corporate finance officer of two multi-billion-dollar companies and has consulted with many others while at McKinsey & Company.
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As registered investment advisors, we are held to a fiduciary standard. The CFP Board’s advertisements to the public now state “CFP Professionals are committed to act in your best interests.” Referring to their clients, a Fisher Investments advertisement states, “As a fiduciary, we always put their interests first.” In theory, the fiduciary standard is quite simple but, like many things in life, theory and reality can be quite different. Let me explain.