Financial advice can be found everywhere. Stockbrokers, for instance, are happy to help you build a portfolio—all too often using their own products, for which they take a commission. There’s another, and better path, though. Using a Certified Financial Planner, or CFP. These folks usually charge a flat fee, so they aren’t incentivized to pump up your trading volume. To make that argument, I turned to a very good CFP, Cameron Mathis, at Mathis Wealth Management. Sure, he is pushing his particular line. But I heartily agree with it.
Larry Light: Tell us why should we use a CFP?
Mathis: Just as you wouldn’t trust a serious legal or medical matter to someone without the right credentials, the same should go for your finances. A CFP has completed rigorous training, passed a comprehensive two-part exam and is required to stay current through continuing education in best practices and developments in the industry. It’s a designation that signals knowledge across investment planning, retirement strategies, tax planning, insurance and estate planning.
Light: What sets a CFP apart from other financial advisors?
Mathis: One of the biggest distinctions is the fiduciary obligation. CFPs are required to act in their client’s best interests at all times. That means their advice should be based solely on what benefits the client, not what earns them a commission or benefits their firm. That’s a major difference compared to advisors who only have to meet a “suitability” standard, where recommendations need only be appropriate, not necessarily best for the client.
Light: Can you give an example showing the differences between the “suitability” standard and the “best interest” standard?
Mathis: Okay, suppose you want to buy a car. You don’t know a lot about cars, but you have a list of characteristics that you want in a car. Let’s say that your characteristics align perfectly with a Toyota Highlander. You go to the nearest car seller, which happens to be a Ford dealership. After listening to the list of things you want in your car, the salesperson says, “Based on what you’ve told me, a Ford Explorer would be a suitable car for you.” And then they sell you a Ford Explorer.
That salesperson has followed the suitability standard by selling you a car that they believed was suitable and then collecting a commission on the sale. The fact that the salesperson only gets a commission if they sell you a Ford is a conflict of interest, but the suitability standard doesn’t require that to be disclosed to you.
Now, let’s say you go to that same dealership, but this time you talk to a salesperson who is acting as a fiduciary, meaning that they must put your best interests ahead of everything else. They listen to your list of requirements, and they say, “What you are describing is a Toyota Highlander, so I believe it’s in your best interests to purchase a Highlander. I can’t sell you a Highlander here, but here’s a list of nearby dealers who sell Highlanders, and here is a list of prices for the vehicle, and the dealer can tell you how much of your purchase price goes toward the cost of the car and how much goes toward commissions or other fees.”
In the second case, the salesperson has acted according to the fiduciary standard; they have prioritized your interests over their own, and they have fully disclosed in writing the costs associated with the recommendation they are providing, as well as any conflicts of interest.
Light: What’s the difference between a broker and an advisor?
Mathis: That’s tricky, because both brokers and advisors can provide people with investments. For clients, the main difference is how they’re compensated. Fee-only advisors are typically compensated by a fee based on a percentage of assets they are managing. Brokers are typically compensated by commissions on products they sell to their clients.
Light: How can someone tell if their advisor is acting as a fiduciary?
Mathis: The simplest way is to ask. Start with: “Are you required to act in my best interest at all times?” Then, ask how they’re compensated. Are they commission-based, fee-only or a combination? And dig into how they arrive at their recommendations. Do they base them on thorough, objective research? A true fiduciary will be transparent, willing to explain their process, and committed to making sure you understand how their advice applies to your situation.
Light: What should clients watch out for when interviewing a potential advisor?
Mathis: Pay attention to how they communicate. Do they use clear language or hide behind jargon? Are they patient and open to your questions? A fiduciary advisor should be focused on empowering you and willing to make sure you understand what is being said and how it applies to your financial situation, not confusing you. If someone seems evasive, overly sales-oriented or using “investment-ese” language, then it’s time to keep looking.