I was recently at a Halloween gathering and friends were telling stories of things that scared them as kids. One friend, I’ll call him Jack, grew up in an old Cape Cod house that his parents rented. Besides the old creaking floor boards and loose shutters, it had a locked attic that the kids were told never to enter. He swore there was nothing scarier than that attic because it was an unknown and his imagination created all kinds of scary scenarios.
This got me thinking. Some people find the idea of engaging a financial planner frightening. It isn’t always clear to folks what a financial advisor does, or why employing one might make sense for them. Sometimes the unknown can create an unnecessary fear. But the right financial advisor can help offer needed guidance and clear direction to make sure we’re making the most appropriate choices for our long-term economic well-being.
I find that many folks start out their financial journey as their own do-it-yourself financial professional. Those folks use brokerages houses to help facilitate their plan. They feel like they can go it alone. However, as our lives progress, our financial situations can get much more complicated.
Getting married, for example, will complicate money matters for many couples. Merging accounts (or deciding to maintain separate bank accounts), and updating investments, selecting family benefits packages from employers – these are all decisions married couples must carefully consider and discuss, to make sure they’re making the right choices to affect the quality of their lives now and in the future. As your family grows and you move through your financial lifecycle, your financial considerations change. Having children will change your tax status. You must save for college and lay the groundwork for an estate plan that makes sure the next generation is properly cared for. Finally, approaching retirement can be a bit scary since for most of us will have accumulated as much wealth as we have ever had and preservation of capital becomes critical. Partnering with the right financial advisor can help you implement the necessary adjustments to your investment strategy as you transition from your accumulation plan to your distribution plan.
Your professional life is another area where the right financial advisor can help. Embarking on a new career, perhaps, or starting your own business – a good financial advisor will be able to help you make the most appropriate choices to assure the best possibility of success, managing cash flow, minimizing your tax liability, obtaining insurance, and protecting yourself and your family if things go awry.
In short, there are many good reasons to consider retaining the services of a financial advisor, whether it’s to answer questions you can’t explain yourself, to defer to someone with more expertise in a very specialized area of knowledge, or because sometimes it’s a good idea to talk with someone who can offer you an impartial perspective.
It’s vitally important to understand that not all financial advisors are the same. While “financial advisor” is a generic term used to describe someone who provides financial advice to clients, it has no specific legal or contractual meaning. Just about anyone can call themselves a financial advisor.
Titles used by some financial advisors confer specific meanings to indicate that they’ve completed particular courses of study and acquired work experience and certification in their fields. Some titles also confer specific legal definitions that are crucially important to understand. Let’s go over some of them.
Many of us are familiar with Certified Public Accountants (CPAs), for example. CPAs predominantly help their customers with tax issues, specifically, while some do offer other forms of financial advice. A CPA must pass the Uniform CPA Examination, which was developed and graded by the American Institute of Certified Public Accountants, or AICPA.
Some CPAs go on to acquire a specialist credential known as Personal Financial Specialist (PFS). The AICPA confers the PFS credential to CPAs who meet specific requirements. These include extensive teaching or business experience, personal financial planning education, and passing a stringent exam to prove their competency in the areas of retirement, financial planning, insurance, estate planning, and taxes. What’s more, PFS professionals must complete 60 hours of continuing education every three years, to make sure they stay abreast of the latest changes in the business.
Certified Financial Planners (CFPs) are a different class of financial advisor. CFPs are financial professionals who have received certification from the CFP Board. Financial professionals who get the CFP certification must take exams similar to the PFS. What’s more, they must complete continuing education programs to maintain their certification.
When it comes to investment advice, there are basically two types. A Registered Investment Advisor and Investment Advisor Representative or a Brokerage House and those brokers that work for them.
Registered Investment Advisors (RIAs) are businesses registered with State or the Securities and Exchange Commission (SEC), depending on their size. The designation has existed since 1940 when the Investment Advisers Act was passed. The Act defined an adviser as “a person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.” People who work for RIAs are known as Investment Advisor Representatives or IARs. IARs undergo very extensive training.
RIA/IARs must work under fiduciary standard. Simply put RIA/IARs are legally obligated to put their clients’ best interest first, always.
A Broker per The Securities Exchange Act of 1934, is any person engaged in the business of effecting transaction in securities for the account of others. By comparison, brokers and brokerage houses operate under a less-stringent “suitability” standard – their advice must only be suitable to their clients’ situation, and that does not always equate to what’s best for the client.
Over the past couple of years, there’s been a lot written about the Department of Labor’s plans to require brokers to adhere to the fiduciary standard. Those plans died in June when the U.S. Fifth Circuit Court of Appeals vacated the Labor Department’s rule. In my opinion, that is a shame.
The SEC is still working on a proposed Advice Rule which would provide updated standards for brokers and brokerage houses, but they fall short of the now-defunct standard put forth by the Labor Department.
There is not yet a uniform standard of care for all professionals dealing with retirement accounts, and with so much of this in flux, it’s crucial for you to make sure your financial advisor is working in your best interest. If your financial professional operates from the SEC-enforced fiduciary standard, then they must charge transparent and reasonable fees, and they are required to work in your best interest.
Hiring the right financial advisor doesn’t need to be scary. Just make sure to review their credentials and understand what obligations they have to you, how their fees are structured and what standard of care they are required to provide to you. The more you know, the less you have to fear.
It turns out Jack went back to that house a couple years ago during a local fundraising event that toured old houses. He finally went into that attic. It was filled with boxes of books, and Jack realized that there was nothing to be afraid of.
It’s all part of what I say every week – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at email@example.com.
Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.
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