What does it mean to be a fiduciary in the financial planning profession? This is a complex question with no uniform answer.
To me, being a fiduciary implies a holistic-style planning approach. You look across clients’ situations, goals, needs, assets and cash flows to create a framework and provide recommendations that are in their best interests.
At the same time, fiduciaries can and should limit their scope of engagement. This saves you from swimming outside of your depth. But if the scope is too limited, it’s likely not true financial planning.
For instance, if I am a financial planner, and I don’t look at stocks, bonds, tax rates or savings, this limited scope makes me something different than a financial planner (e.g., retirement plan specialist, insurance product specialist, etc.).
But to provide quality financial planning and recommendations, you need to see a wide range of client assets, goals, strategies and needs. A football coach can’t make the right play call in a game unless they know the down, distance, score and time on the clock.
Oftentimes, clients’ largest assets and liabilities are ignored at the expense of limiting scope. But making decisions without perspective leads to inefficient and sometimes harmful outcomes. And giving advice in a vacuum diminishes its power and impact.
If you’re a fiduciary, home equity and insurance are two priorities you will include in the planning process, no matter your scope of engagement.
I believe not including home equity into the financial planning process is one of the biggest failures of the financial services industry and a fiduciary financial adviser.
In a recent study published by the Academy For Home Equity In Financial Planning at the University of Illinois at Urbana-Champaign, many of the surveyed financial advisers said they were prohibited from making mortgage recommendations by compliance, yet a handful said they still make recommendations. Other survey respondents who said they were unsure if they were prohibited by compliance also made recommendations. How is this in the best interest of a client?
You could limit a scope of engagement to just reviewing and educating on mortgages, reverse mortgages and home equity, and forgo making recommendations. But when you step back and think about how big of a financial decision home buying, renting or refinancing is for a family, I personally want my fiduciary financial adviser to be a part of the process and guide me in that decision.
For many Americans, their home is their largest asset and liability. If you can’t plan around it or incorporate it into the planning process, how can you say you work in the best interest of the client?
The other important asset and liability that fiduciaries need to include in the planning process, no matter their scope of engagement, is insurance. Like home equity, insurance is fundamental to wealth and financial security in the United States. Helping clients across the insurance spectrum – from disability, health care, property and casualty, life insurance and annuities – helps create better plans.
You can get into a never-ending, more detailed discussion about compensation models when it comes to insurance. But on a basic level, compensation needs to be upfront, understood by the client and fully transparent. The Value of an Advisor research findings published in 2020 showed that clients are happier with transparent compensation models.
Compensation models have unique benefits and drawbacks, biases and conflicts. Some compensation models are challenging with fiduciary planning because the conflict of interest is real and can drive an adviser to make recommendations in their own interest instead of a client’s. As fiduciary financial planners, you have to limit conflicts, avoid them and eliminate them to put client interests first.
Fiduciary financial planning requires you to understand your clients, see the big picture, and help them across the planning spectrum – not just in ways that gather assets, sell products or make money. Mortgages, home equity, annuities and insurance are crucial parts of anyone’s financial picture. Ignoring a client’s largest assets is ignoring their best interests.
Jamie Hopkins is director of retirement research for Carson Group and managing director of Carson Coaching.
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.