How to Avoid Getting Lost in the ‘Wild West’ of Financial Advisors

On this episode of The Long View, Pam Krueger, founder and CEO of Wealthramp, discusses what to look for when choosing a financial advisor, different fee models, and the role of the fiduciary standard when seeking financial advice.

Here are a few highlights from Krueger’s conversation with Morningstar’s Christine Benz.

Why Fee-Only Models for Financial Advisors Are a Better Option Than Commission Products

Christine Benz: Just define fee-only so that everyone’s following along and maybe contrast that with what would be a different model and why you would prefer the fee-only model versus someone who’s, say, selling commission products.

Pam Krueger: The easiest way to think about fee-only means the advisor. The advisor’s fee is only from the client. That means that the advisor works only directly for clients, not for a brokerage firm, not for an insurance company. So, that puts you on the same side of the table. Just because you’re on the same side of the table doesn’t necessarily mean that a fiduciary fee-only advisor is going to be highly qualified, but it does at least sort out the business model so that there’s an advice model, and that’s the fee-only where the advisor’s working only for you. And then there’s the sales model, which is the old model that I grew up with when I was a broker, which is now called an advisor at a brokerage firm. And that’s where I work for the brokerage firm. I don’t work for the client. And that means that my first loyalty goes to my employer, which is the brokerage firm. And that brokerage firm expects me to recommend certain products and certain strategies that are going to be good for the brokerage firm. We hope it’s going to be good for the client as well, but I didn’t like the model because I felt that going to a sales model for advice was like going to a wine shop, looking for a craft beer. If I want advice, I really need to go to an advisor who is registered with the SEC or state and is legally held to the fiduciary standard. And that’s a big difference.

The Importance of the Fiduciary Standard

Benz: Let’s delve into that fiduciary standard. The term has arguably gotten a bit watered down. In fact, I’ve heard consumers say, “I feel like it’s useless.” Can you discuss what it means to be a fiduciary and how you go about verifying that someone is truly a fiduciary?

Krueger: It’s really simple. Anybody can do this. When an advisor is registered as an investment advisor, a registered investment advisor, and their information is stored in the database of the SEC or the state; they are regulated by the state or the SEC. They are, by definition, legally bound to act in the individual investor’s best interest in a fiduciary capacity. That’s very different from saying that you’re a fiduciary and you’re not legally held to the standard, but maybe you hold yourself to that standard, or maybe it’s an ethical standard, or maybe it’s a mood you’re in that day. You might wake up in the morning and say, “Boy, do I feel fiduciary today.” But what does that have to do with the reality of being legally held to the fiduciary standard? There’s only one type of advisor that’s legally bound, and that’s the registered investment advisor.

Suitability Standard vs. Fiduciary Standard

Benz: Brokers are held to what’s called a suitability standard. Can you contrast that with the fiduciary standard that a registered investment advisor would be held to?

Krueger: I worked for a brokerage firm when I was 24, and I was in management and managed 60 brokers when I was 28. My biggest concern was to make sure that we were distributing the products and recommending the products, recommending the investments, the funds that client could call suitable for themselves. Or you could say, “This is a good fit.” You are a person who is 65. I can see where I can make the case that this annuity might be a great fit for you. It’s suitable for you. That’s very different from being held to the fiduciary standard legally, which says you have to make sure it’s in their best financial interest, which means that requires a much deeper dive.

How to Avoid Getting Lost in the ‘Wild West’ of Financial Advisors

Benz: At the top of the conversation, you mentioned that the financial advisor space is a little bit of a “Wild West.” You have people with serious credentials proffering advice, as well as people with very little experience. Maybe you can talk about the broad universe of financial advisors. What are the legitimate subcategories of serious financial advisors? And maybe you can describe what they do.

Krueger: Well, remember, you’re asking me, and I’m going to have an opinion.

Benz: That’s good!

Krueger: I think what I did so far back in my career at the age of 28 was I had a fork in the road. I hit a fork in the road in my career, and I had to decide. I had to pick a lane. Do I want to be in sales and selling products and making recommendations for products? Or do I want to be in wealth management and advice that includes tax planning and real financial planning, deep, deep-dive financial planning? And my decision was really clear. I wanted to go the registered investment advisor, fiduciary route. And that was my fork in the road. I think that every individual can start with that fork in the road. You can start there because 90% of financial advisors are on the sales side, meaning they’re not independent. They’re not registered investment advisors who are working independently. They are tied to brokerage firms or insurance companies. That leaves about 60,000 on this fork over here on the fiduciary side. Now, you’ve got a much smaller problem to solve. Instead of 500,000, you’re down to 60,000.