Fiduciary Duty Isn’t Enough; Your Planner Better Not Suck, Either

“I have no idols. I admire work, dedication and competence.”
–Ayrton Senna

A friend of mine once got a chocolate lab and wanted to build an outside dog run so that his dog wouldn’t go crazy from lack of exercise. Apparently, everyone else he knew within a five hundred mile radius must have had other pressing obligations (“I have to go get a brain transplant” or “Sorry, I have to wash the cat this weekend”), as he asked me to come help him put up the fencing.

Anyone who knows me reasonably well would suffocate from being unable to breathe while laughing so hard due to my sheer incompetence when it comes to performing mechanical tasks. My tank crew relegated me to things like tightening and loosening bolts and checking battery water during maintenance lest I do something which could potentially affect the actual functioning of the tank. As my father used to tell me, I could break an anvil. Hello, self-fulfilling prophecy.

So, lured by the opportunity to meet his dog and the promise of a six pack of his home-brewed beer, I headed over to his house to “help.” I’d never built a fence before, but, in theory, the execution of such a task wasn’t too difficult. Dig hole. Put fence post in said hole. Wrap fence around. Tie fence to post. Turn dog loose in new contained outdoor environment.

We decided to head in opposite directions and meet at the other end of the dog run. It was to be like the cross-country railroad build in the United States where the two teams started at opposite ends of the country and were supposed to meet in the middle. I got going, and pretty soon, I had a decent rhythm going. Within a couple of hours (maybe it was only a few minutes, but it seemed like hours), we met on the other end. We turned back to survey our work.

His side looked like he’d used a slide rule to build the fence. It was straight and perfectly spaced.

Mine looked like Salvador Dali had built a fence.

Aside from having unrolled the fence and pulled out posts, my work was useless. We had to do my side over again, and my role was reduced to holding fence posts in place while he did everything else. We’d have saved a lot of time and blood pressure (on his part) had we done this in the first place.

My heart was in the right place, but good intentions do not a straight fence build.

A recent discussion on Twitter reminded me of my fence-building exploits (Robert Frost would not have been pleased). The question posed was about what the most important trait a financial planner could have. I’ve previously argued that fiduciary duty is the most important trait a financial planner can have; however, while it is a necessary requirement, it is not sufficient.

The other mandatory requirement is that the financial planner better not suck at what he or she does.

Since I’ve become a financial planner, I’ve had the opportunity to meet with other financial planners. Some of them are really good, and know their stuff cold. They understand personal finance and money, and if I got run over by the beer truck, I’d have no problem having my clients go to these people in times of need. If the world was full of these types of financial planners, then I would have never had the desire to become a financial planner in the first place, as part of my motivation is driven by a sense of justice and righteousness to save people from crappy financial advice which is driven by a desire to line the salesperson’s planner’s pocket.

Then, there’s the other group. Unfortunately for the public (and probably fortunately for me and the first group, because it creates lots of opportunity), these “financial planners” suck. They’re terrible. They couldn’t explain basic concepts like alpha or safe withdrawal rates, much less slightly more esoteric concepts like the advisability of backdoor Roth IRAs or small business succession planning strategies. They’re focused on getting commissions and trying to lure people into buying their trash products. They are good at one thing – selling to the uninformed. If you don’t know the effects of loads and fees on your investments, then you are a wounded zebra to their pack of jackals, and they will descend upon and devour you and milk you all while giving you horrendous financial advice.

How can you tell the good from the bad? Here are some things to look for and ask about when you’re looking for a financial planner:

Did this person pass the CFP® exam? The CFP® exam is the recognized standard in the industry for understanding the basics of financial planning. It’s comprehensive, and it’s not easy. The pass rate is generally in the 50s for a reason. As I told my wife after the exam, they could have told me that I didn’t pass (I did pass) and I wouldn’t have been surprised; it was that tough.
Don’t allow a bunch of other “credentials” to create an aura of competence which isn’t there. There are a handful of credentials which are useful: CFP®, which I discussed above, CPA, and CFA. While you shouldn’t use your CPA to do your financial planning and you shouldn’t use your financial planner to do your taxes, the other certifications also have usefulness to financial planners. The CLU and the ChFC are also good, although I wouldn’t classify them in the same category as the first three. Almost all of the rest are useless – someone paid money to get a bunch of initials. Don’t be fooled by someone who ends their byline with “, MBA” as in “John Smith, MBA.” If you’ve done something meaningful with your life, you won’t feel the need to put “, MBA” in there. You’ll notice that I never sign anything “Jason Hull, MBA” even though I went to a highly acclaimed business school. Additionally, don’t let someone tell you that the Series 65 or 7 or 66 exams add credibility. The exams are ridiculously easy.
Look for someone who has some real life experience which is useful and relevant to you. Did the person get a portfolio by smiling and dialing a lot and convincing people to go with his investment plan? Are you going to trust your financial future to someone who has zero in savings, a smattering in investments, and a boatload of debt? Book learning is all well and good (see my comment about “, MBA” above), but there’s a wide chasm between book learning and successfully putting it all into practice.
Does the planner eat his own cooking? This is why you will ask to see personal financial information about the planner. Ask to see the financial planner’s balance sheet and his or her investments. Ask to see his monthly personal budgets. Ask about his or her real world experience besides doing a lot of smiling and dialing and sales. Yes, we’re all salespeople (and so are you, if you’re doing your job correctly), but you want someone who has some practical, relevant, real-world experiences to share with you rather than whatever his or her script tells them to say next. Furthermore, is the planner trying to sell you high commission loaded mutual funds for the Kazakhstan Emerging Pork Snout Markets Fund which will pay him 4.9% in commissions and send your money flushing down the drain while he’s not invested in the same said fund? That should be a huge red warning flare for you. Is the planner telling you to go get a bunch of zero money down real estate purchases while sitting on a bankruptcy or on a bunch of foreclosures? Get full disclosure. Also, go look up the planner on Brightscope and see if there are any negative marks on the record that the planner conveniently “forgot” to mention to you.

Why do I write these? Sure, I’d love to help you out, if you need it, with your financial planning and teach you what I know (contact me, maybe?), but, honestly, I’ve been there. I’ve been suckered into some of the same cockamamie financial planners’ ideas too (read “Chart Porn and Personal Finance” for my story). If I can keep people from torching their money by spending money on these incompetent gasbags who don’t know what they’re doing, then I’ve done a great service. We need better education about the financial planning industry in general so that we can identify the charlatans and shine the light on them. We also need to understand that while having a good heart and good intentions is nice, if the competence isn’t there, then the advice you receive from an incompetent, but well-intentioned planner could be just as harmful as the advice you receive from someone who does not have your best interests at heart.

What else should someone look for in a financial planner? Did I leave anything out? Tell us what you think in the comments below!

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John Davis

John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.