Fiduciary Compensation: For Service to the Client
JUNE 29, 2020
Any time one person charges for services there is buyer-seller conflict and no single method of compensation that always works best for the client. In pure wealth management, performance based fees might be preferable but government limits their usage. Thus the CFP Board’s fiduciary standard of conduct says merely that planners must “…put the interests of the client first, and should include both a duty of care and a duty of loyalty.”
In the past, doctors were quacks, lawyers were shysters and stockbrokers and insurance salespeople had the reputation of the liar for hire. Now medicine, accounting and–jokes aside–law have professionalized with greater expertise and justifiable fees; At Carpe Diem, I have the desire to give services with minimal conflicts of interest to detract from sound planning. Commissions on insurance or securities sometimes provide the only access to superior products–but they also can encourage product sales regardless of value rendered; Assets Under Management fees are relatively neutral from a fiduciary standpoint, but the following incentives may work against fiduciary planning:
- Commissioned salespeople, largely paid once for the sale of a product, have little incentive to plan holistically, sell losing stocks, aid retirement distributions or follow up post-sale with financial therapy and coaching.
- AUM-based wealth managers win or lose pay and client money based on market gains and losses largely outside their control and may be over or under compensated.
- Neither has incentives to manage 401(k) or 403(b) retirement accounts carefully as these accounts are employer controlled.
- Commissioned salespeople and AUM managers have little incentive to advise business investments or realty development which pay no commissions or AUM fees.
- Asset managers fail to oversee insurance salespeople and estate lawyers well.
Minimizing Conflict to Maximize Bliss: Compensating Financial Planners by the Retainer Method
Roy Dilberto asks if anyone would hire a doctor who works solely for fees on drugs sold. If physical therapy, for instance, were a better solution than drugs, would it be prescribed as frequently? AUM fees may work well for someone who merely claims to be a wealth manager. But holistic CFP professionals are more likely to serve clients as fiduciaries if they charge for services rendered hourly or by retainer. Our services are “bundled” for efficiency into one advisor who deals with all matters financial who may save money over hiring separate experts with special interests. Our advice is golden; it is not just a “loss leader” and professionals may charge for it. Quarterly retainer fees allow us to do planning as an ongoing process, not as sales of a product or a pie graph.
Carpe Diem intends to make retainer fees lower than AUM or commissions; I hope to make SLV’s middle class people wealthy, healthy and wise. These fees allow for long-term financial therapy and coaching, which I offer in abundance. Financial planners need to be paid for our wisdom or, ultimately, we would not provide it en masse: “Our clients can find and implement investments on the Internet,” writes Dilberto,” but they will never find the wisdom of a competent and caring financial planner who can make the difference between financial success and failure…”