Fiduciary vs Suitability
As you may not know, the new DOL Fiduciary rule goes into effect on January 31st. The new rule imposes a fiduciary standard when recommending a rollover of qualified funds (including IRAs, 401ks, and 403bs) to a new retirement account, including IRA to IRA transfers. As a CFP financial planner, I already act as fiduciary for all of my clients. This means that I have an obligation to provide investment advice in the clients’ best interests. So the enforcement of the rule doesn’t really change much for me.
However the new DOL rule now requires that the recommendation to roll over a qualified plan be documented to show how that recommendation is in the client’s best interest. To achieve compliance with the new DOL rule, a qualified account comparison form will be required to be completed for all qualified account rollover recommendations. The form is designed to show all factors considered in making the recommendation including costs, options, and services offered. Now again I do this already anyways, however other “brokers” and “financial advisors” might not.
Previously “brokers” and “financial advisors” just had to make suitable recommendations but not in the best interest(fiduciary) of the client. What’s the difference?
“You describe your dream car to a Ford salesperson. Best interest is when that salesperson recommends their most suitable Ford. Fiduciary is when that Ford salesperson says you just described a Chevy and recommends visiting the Chevy dealership”
Or a Butcher(suitability) vs Dietitian(fiduciary):
To dive a little deeper. At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:
Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm
Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict
Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional’s Firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s interests above the CFP® professional’s.
What Is a CFP?
Certified financial planner is a professional designation awarded to financial advisors who have passed rigorous coursework and an examination to prove their fluency in all aspects of financial planning.
CFPs must undergo years of training—4,000 to 6,000 hours in total—before they are eligible to place the letters CFP after their name. They’re also obligated to continue their education even after receiving certification.
The years of training aim to prepare a CFP to help you identify short- and long-term goals for your financial life, make a plan to achieve your goals and then execute on the plan. Goals can include saving for college, navigating debt repayment, preparing for retirement or maximizing the impact of your charitable giving.
CFP vs. Financial Advisor
While most CFPs call themselves financial advisors, not all financial advisors are CFPs. Understanding the difference is important for a few reasons.
A financial advisor can be anyone who helps you manage your money. There’s no specific licensing or certification process required for someone to call themselves a financial advisor. Typically, a financial advisor will have passed some kind of licensing exam that allows them to buy and sell securities on behalf of their clients.
Financial advisors can be fiduciaries or non-fiduciaries. If they’re not held to a fiduciary standard, they may only be held to a suitability standard (butcher), meaning they’re required to offer suggestions that generally fit their clients’ financial situation, whether or not they have higher fees or bigger commissions than other options.
A certified financial planner has proven their ability to provide comprehensive financial planning services and may also provide investment advice and recommendations. All CFPs must meet the same basic requirements to earn the privilege of carrying the CFP certification. CFPs also must always act as fiduciaries when providing financial advice to their clients.
Who Should Choose a CFP?
If you’re looking for a comprehensive plan that can grow with you, covering every aspect of your finances, a CFP might be a good fit. A certified financial planner can help you craft a budget, make a plan to save for your children’s education or help you navigate an unexpected inheritance. If you’re big on ideas but short on financial savvy, a CFP could help you bridge the gap between where you are today and what you want your finances to look like.
Frankly, if you are looking for competent and ethical financial planning advice, you should start and end by looking for someone who holds CFP certification.
Where Can I Find a CFP?
Finding a CFP is as easy as a web search. You can visit LetsMakeAPlan.org, a website where you can find credentialed experts in your area.
I recommends= that anyone interested in working with a CFP does some homework first. Find a few different CFPs to speak to and then narrow down your options as you get to know each.
Not every CFP may be best suited to work with your particular financial situation. Some CFPs, for instance, specialize in particular types of clients, like those managing extensive amounts of student debt. Make sure your CFP has experience working with people from similar financial backgrounds as you.
From there, you can start to build a relationship with a financial planner that builds a lifetime of benefits.
About the Author
Erik Barnes, CFP®, is a fee-only financial advisor serving clients locally in Naperville, IL, and the surrounding Chicagoland area and throughout the U.S. He is a member of XY Planning Network, a group of fee-only financial advisors who focus on serving those in Gen X and Gen Y, as well as NAPFA, Fee-Only Network, and the Financial Planning Association. Erik has worked in financial planning for 20 years and takes great pride in helping clients on the road to retirement. When he’s not building financial plans, you can find Erik tinkering with his fantasy football roster or checking out one of the many food spots in Chicagoland.