Career Crossroads: The Right Path for My Future in Wealth Management

Fork roads in steppe on sunset background

I’d like to start by introducing myself.  My name is Nick Schiavi and I recently joined the Detterbeck Wealth Management team in the hopes of learning wealth management and becoming a Certified Financial Planner.  As I approached the end of my college days, I thought I had everything figured out.  I was about to graduate from Northern Illinois University with a Bachelor’s degree in Finance, Marketing Minor, and a Professional Sales Certificate.  I studied these subjects with the intent of pursuing a career in wealth management.  This seemed like a fairly straight forward career path at the time with the thinking that strong advisors are good with numbers, comfortable with communication and receive the proper training.  I had no idea there were so many different routes this career path offers.

Out of school, I accepted a job with an insurance company and thought I was on my way to becoming a financial planner.  On the first day of training, we were required to cold call and set up meetings with the goal to sell life insurance.  The company did a great job selling the in-training representatives on the idea a whole-life insurance policy is the best place to put your money for retirement.  The other trainees and I were impressed when learning a policy and reinvested dividends grow tax free and can (somewhat) diversify a portfolio.  It made me wonder how many other/better approaches there are in the field.  If a whole life insurance policy is the answer to everyone’s long term financial needs, then why doesn’t everyone just do that?  Why is the field so complex and difficult?  Why do hundreds of books and dozens of TV shows analyze this topic to no end?  I knew there was more to it and I wanted to learn.  So… I decided on a new path and set out to interview at as many financial services companies as possible, and this time, do as much due diligence as I could before making a decision.

I started my search by applying to all of the major wirehouse and brokerage firms with the assumption they were the best at what they do and train their employees to be the best in the industry.  That is what I had heard and believed.   However, the more I interviewed, the more it dawned on me all of these companies are similar in practice to the insurance company that first employed me.  The business model they use is to have their employees pass the licensing test, start selling the products and achieve required sales goals to keep their job.  Many times I was told I could give it a shot, but it would be better to get a sales job for a couple of years and come back when I was ready.  Why would I get a random sales job to become a better financial advisor?  If anything, it seemed I might forget most of what I just spent four years studying in school.

What I really felt was most important was to find someone to mentor me in the industry. I was ready to work long and hard to learn the complexities of investing, planning and overall comprehensive wealth management.  I wanted to believe there are advisors who succeed by being investment experts and wealth managers, instead of being great salesmen.  Don’t get me wrong, sales is great and arguably the most important aspect to any business.  I just felt a financial planners’ best skill should be financial planning, not sales.  The tides turned when I received the advice to look on NAPFA.com and search fee-only advisors in my area, ultimately leading me to exactly what I had been looking for at Detterbeck Wealth Management.

Since starting at DWM, I have learned a lot and now respect how many different hats a strong wealth management team must wear in order to best serve clients.  One of the first things I learned is how little people know about the industry and how easy it is to believe that the big firms are the best place to invest your money.  It reminds me of golf, it is a game of opposites; if you swing left, the ball curves right- swing right, the ball curves left.  Wealth management is similar.  It is normal to think having your money with a big firm is a good idea, it makes sense to think they are the best at what they do (given all the marketing dollars they have to convey that message).  In reality, it is the RIA (Fee-Only Advising) firms who typically have the best client-centric culture rather than a company-centric mentality.  At DWM, it’s about providing value to customers.  These are the advisors who place their clients’ interests first in a fiduciary manner and do not make commissions on sales.  RIA firms like DWM bring clients on slowly to fully understand their needs and create the best possible plan.

All in all, the start to my career has been great.  Coming out of school I wanted to learn this industry and had no interest in “faking it until making it.”  There is no faking at DWM; every time I am given an increase in responsibility it is because I have been trained and fully understand what I am doing.  I’m new to the real world, but this seems like the proper way to run a business – especially one focused on helping people achieve their personal and financial goals.

Nickolas SchiaviEditor’s Note:  Please join us in welcoming Nick Schiavi to our DWM team.  Nick joined our firm in late April as a service associate and is training/learning/working toward becoming a junior advisor. Welcome aboard, Nick!

Fiduciary Standard Closing in on Reps and Brokers

willie sutton3Annuity salespeople may soon be facing a new, huge hurdle. The WSJ reported last week that the Department of Labor has proposed that advisers working with retirement savings be held to a “fiduciary” standard. We’re all for it. A fiduciary standard means that an adviser must work in the best interests of the client and avoid conflicts of interest, such as commissions and other sales-based compensation. Registered Investment Advisers, such as DWM, on the other hand, are required to always be fiduciaries for the clients. Sales representatives and brokers for banks, insurance companies and broker-dealers, are not. They are held to a “suitability” standard based upon a prospect’s financial objectives, current income level and age in suggesting various products for which they are paid commissions and fees.

Our regular readers know that annuities and fiduciary standards have been topics in past blogs. In our June 24, 2014 blog (http://www.dwmgmt.com/annuities-buy-hold-or-surrender/) we discussed variable annuities. As a product, they do enjoy tax-free growth, which can be helpful. However, the problem is cost. According to Barron’s, the average contract cost is 1.5% per year. In addition, VAs generally use high-cost actively managed funds within, adding 1% or more. As a result, there can be a 2.5% or more drag on performance each year. These days, that may represent 50% or more of the gross return.

Insurance companies, which issue annuities, along with the brokerages and individual financial advisers who sell them, are not happy. Right now, many of these annuities pay an 8% upfront commission, most of which goes to the salesperson (who has been deciding for many prospects that these products are indeed quite suitable.) Variable annuity sales totaled $98 billion in the first nine months of 2015. Think of the upfront commissions- perhaps $7 billion to $8 billion per year. This is paid by the consumer through ongoing charges and surrender charges if the policyholder drops the contract within a certain time period, such as 7 years.

Furthermore, over 50% of the sales are made to retirement accounts. It’s amazing; retirement accounts grow tax-free, just as annuities do. So, there is no tax benefit to purchasing an annuity within a qualified account. However, as we know, there are trillions of dollars in retirement accounts which makes them perfect targets for annuity salespeople. It reminds us of Willie Sutton, the prolific American bank robber, who when asked why he robbed banks, he replied “Because that’s where the money is.”

The proposed DOL rule is expected to be finalized as soon as next month. This will likely lead to a change in upfront commissions and likely a big reduction in sales, at least in the beginning. Fiduciaries, like DWM, applaud this change. We want clients to do well, not the salespeople.

Regarding fiduciaries, perhaps some of our readers remember our blog from November 18, 2014 (http://www.dwmgmt.com/door-number-one-door-number-two-or-door-number-three/) where “Money Hall” asked readers to pick from three financial advisers standing behind doors 1, 2 and 3. Adviser #1 was a broker, whose products likely included variable annuities as we discussed above. Behind Door #2 was an RIA who was a “fee-only” fiduciary. Adviser #3 was both an RIA “fee-only” fiduciary and a value-added wealth manager, with a quality management system to organize, formalize, implement and monitor all investment management and financial planning activity for clients.

It’s amazing what some advisers, such as those behind Door #1, will do to sell their products. They try to tell prospects they always put their clients’ interests first, though their industry fights tooth and nail to try to avoid being covered by a blanket fiduciary responsibility. They tell prospects they are “fee-based”, which we have come to understand as “fee-plus” meaning that they may take up-front fees, part of fund operating expenses as well as a fee based on assets. No surprise that they are not interested in becoming fiduciaries.   Their standard of living would likely take a big drop. If this keeps up, they may need to change their focus from selling “suitable products” to actually helping families increase their wealth by adding value. What a novel idea!

What is NAPFA?

NAPFAElise recently helped me change the artwork in the office. Added some, moved some, and removed a couple. The best addition was a map of Sanibel Island signed by our kids and grandkids, and now, thanks to Elise’s help, it includes pics of everyone. Sanibel has always been a special vacation place for our family. Great memories.

Another nice addition was my NAPFA acceptance letter, related Fiduciary Oath signed by me, and the recent Accredited Investment Fiduciary (AIF®) certification I received. Brett has these three items in his office as well. We’re often asked by clients and others for more information on NAPFA and AIF® so we thought it might be worth an explanation.

NAPFA (pronounced ‘Nap-Fah’) stands for the National Association of Personal Financial Advisors. NAPFA and its members are all about bringing integrity, honor, and trust to its clients and to investors in general. Its members are strictly fee-only, independent, Registered Investment Advisors just like DWM. NAPFA vets its candidates very carefully, including credentials, experience, peer review of a sample comprehensive financial plan, and signature and adherence to NAPFA’s Fiduciary Oath.

The AIF® designation is awarded by the Center for Fiduciary Studies, the standards-setting body for fi360, the first full-time training and research facility for fiduciaries in the country. AIF® is a very select group. There are only 6,000 AIF® designees currently, as compared to 70,000 CFP® certificants. AIF® designees are the only recognized professionals trained to perform fiduciary assessments, which measure how well investment professionals are fulfilling the fiduciary duties required of them by the applicable investment legislation, case law, and regulatory opinion letters. AIF® designees, like Brett and myself, are able to use the knowledge and resources they have gained through their training to better organize, formalize, implement and monitor their processes and procedures. Studies show that a prudent process improves investment results.

There is a tremendous investor movement away from large brokerage firms to smaller, fee-only independent firms such as DWM. In my opinion there are two key reasons for this: results and trust.

According to the WSJ, “Investors are Fleeing Active Stock Managers.” Actively managed stock and bond mutual funds are the building blocks used by many large institutional wirehouses. The operating expense of an actively managed mutual fund is generally a minimum of 1% more per year than a passive, low cost mutual fund or ETF. Actively managed funds have a lot of expenses a passive fund doesn’t have. These can include research (to try to beat the market), trading, marketing, upfront fees, sales fees and others. Of course, the institutions that promote these actively managed funds to investors receive part of those operating expenses as “revenue sharing.” The investor comes out the loser in this format, since studies have shown time and time again that actively managed stock and bond funds over time don’t “beat the market”, but rather they consistently underperform the benchmark indices. And, that underperformance is usually by about 1% or more, just about the same amount as the “excess fees” over passive investments. The extra 1% in expenses goes right to the bottom line, especially these days when diversified stock returns are more likely in single digits than double digits. A 1% drag on a $1 million portfolio would reduce the appreciation over 20 years by $600,000 or more. It’s no surprise that many large institutions don’t even provide performance results with their statements. The reports can be 100 pages long and yet there is no performance data provided (i.e. time-weighted return calculations). The WSJ article puts it this way, “U.S. active managers destroyed the trust of individual investors and financial advisers, neither of whom want to pay up for active management that can’t beat an index.”

So, many large brokerage institutions have tried to gain the public’s trust (and their money) by advertising themselves as fee-only and fiduciaries. While there may be a small portion of their offering that does qualify to use these terms, their overall business model is generally focused on making money for the institution and its employees. They may charge a client a percentage of asset fees for managing money. That’s not all they get. They often receive “revenue sharing” from mutual fund companies they promote to clients and receive commissions for selling annuities and life insurance contracts.

Have you seen the recent Charles Schwab “Why” TV Commercial? The ad revolves around a boy who quizzes his father about the real value the family’s financial advisor provides. It suggests that most children can see that the wirehouse business is stacked in favor of the advisor, not the client. These days, both children and their parents are really questioning what they are getting and paying these brokers. True fiduciaries put their clients’ interests first and disclose any potential conflict of interest. They hold themselves accountable for results and make full disclosure to their clients. And, they provide additional value-added services and transparency. The general public, I believe, is recognizing that the wirehouses just don’t do that.

NAPFA and its members are gaining a lot of traction. Investors looking to move from the old wirehouse paradigm can contact NAPFA and use its website www.NAPFA.org, to find vetted financial advisers in their area who might be a good fit for them. DWM gets communication, prospects, and ultimately clients from our association with and link to NAPFA. No money changes hands between us. Like DWM, NAPFA is all about doing the right thing; bringing integrity, honor and trust to its clients and investors in general. That’s why we are proud to be members of NAPFA® and AIF® designees.

Door Number One, Door Number Two, or Door Number Three?

LetsMakeaDealRemember Monty Hall? He was co-creator and game show host for “Let’s Make a Deal”, one of America’s all-time favorite game shows. Contestants were asked to decide which door they wanted. Behind the three doors were some booby prizes and some very valuable items. Problem was- the contestants didn’t know what was behind the doors.

Today, we’re changing up the game. Money Hall is going to ask you to decide which door you want. Behind doors 1, 2, and 3 are three very different financial advisers, all of whom want to manage your money. But today you’ll have an advantage. Money Hall is going to open each door for you and give you a detail of the adviser behind each door before you make your choice.

Money Hall: “Ready, let’s open Door #1. Financial adviser #1, please tell us about yourself.”

Financial adviser #1: “I’m a broker with XYZ Bank. I’ll do my best to sell you the products and services of XYZ bank. However understand that my primary obligation is to my employer.”

Money Hall: “Let me add some other important information about adviser #1. Adviser #1 is paid based on fees and commissions he or she generates for XYZ. He or she is required to make “suitable” recommendations to investors. However, he or she has no obligation to put your interests first. Investments don’t have to be the most appropriate, merely “suitable.” The “suitability standard” favors the brokerage firm and its employees over the investor. It also creates a conflict of interest between the adviser and the investor. Finally, XYZ bank considers its’ compensation to be “fee-based”. This means it receives fees from customers, commission payments on annuities and insurance contracts, and revenue sharing payments from mutual funds it recommends to its customers. Adviser #1 is a CFP® practitioner.”

Money Hall: “Thank you, adviser #1. Now let’s open Door #2. Financial adviser #2, please tell us about yourself.”

Financial adviser #2: “I work for LMN Company, a Registered Investment Advisor. We don’t sell products. We are fiduciaries and put our clients’ interests first.”

Money Hall: “Let me add some other important information about adviser #2. Adviser #2 is required by law to act solely in the interests of clients and disclose any potential conflicts of interest. LMN is a fee-only RIA. Its only income comes from fees paid by clients. It receives no commissions or revenue-sharing. Adviser #2 is a CFP® practitioner.”

Money Hall: “Thank you, adviser #2. Now let’s open Door #3. Financial adviser #3, please tell us about yourself.”

Financial adviser #3: “I’m an owner of ABC Company, a Registered Investment Advisor. I have signed a fiduciary oath stating that I will always put our clients’ interests first. Our firm works hard and uses a systematic, prudent process in all areas to fulfill our fiduciary commitments to our clients.”

Money Hall: “Let me add some other important information about adviser #3. Adviser #3 is similar to financial adviser #2 in that he or she is required to act solely in the interests of and with undivided loyalty to their clients and disclose any potential conflicts of interest. In addition, though, adviser #3’s firm consistently uses a fiduciary quality management system (analogous to ISO 9000) to organize, formalize, implement and monitor the proactive financial planning and investment management it performs for its clients. ABC is a fee-only RIA. Adviser #3 has the CFP®, CFA, and Accredited Investment Fiduciary (AIF®) designations.”

So, it’s now your choice. Door #1, Door #2, or Door #3? Who will manage your money? Who do you want to be your trusted adviser? Who will always put your interests first? Who will always disclose potential conflicts of interest? Who has a proactive process to make sure they fulfill their fiduciary obligation to you? And, who has best demonstrated their commitment to you and excellence in their profession through their multiple credentials and experience?

Did you make your selection? We hope the choice was clear. If it was, you might be as happy as this couple:

LMADBTW, if the adviser behind Door #3 sounds like someone you know, it is. Brett and I are CFP® practitioners, CFA charterholders, and AIF® designees. DWM believes effective relationships between investors and advisers are built on trust. That trust is grounded by a commitment by the adviser to act solely in your best interests.

However, it goes beyond that commitment. It requires the application of a prudent process consistently applied, which we do every day. We value greatly our role as wealth manager and fiduciary with our clients as it puts us in a special relationship of trust, confidence and legal responsibility. It’s a role we don’t try to avoid, it’s one we cherish.

Forbes: “Why Wall Street, Insurers Don’t Want Fiduciary Duty”

client centricDefinition: “A fiduciary duty is a legal duty to act solely in another party’s interest.” It may not seem like much, but it’s really a big deal in our business. Registered Investment Advisers, like DWM, have a legal responsibility to put their clients’ best interests first. Wall Street banks and insurance companies don’t. In fact, they “hate the idea” according to John Wasik, in the most recent (8/23/13) Forbes. Mr. Wasik continues: “It would alter their business models and change their bottom lines forever.”

Fiduciaries are not only legally bound to put clients first, they are also required to disclose all investment costs and potential conflicts of interest. Brokers and insurance companies aren’t. To protect investors, the Securities and Exchange Commission and the Department of Labor have been working to mandate fiduciary rules for all financial advisors, including banks, brokers and insurance companies.

Brokers have been putting up a massive effort to avoid the mandate for fiduciary rules. Mr. Wasik feels you have to “look at the profit motive behind the broker-adviser model to understand why Wall Street and insurers are fighting like wolverines to kill fiduciary rules.” It’s all about compensation.

Mr. Wasik quoted Kathleen McBride, a founder of the Committee for the Fiduciary Standard who stated, “Currently, brokerage firms and insurers look at investors as cash cows. They look at using the investors to serve the firm. They are firm-centric, not client-centric. There is a fear at brokerage firms and insurance companies that if they have to put investors’ interests ahead of their own they won’t be able to sell the high commission, high fee securities they routinely do now- that are in the firm’s interests but not the clients.”

Ms. McBride continued, “As fiduciaries, brokerage firms would have to reveal all the costs the investor is paying- what the firm receives and what the broker receives- commissions, fees, revenue sharing, 12b-1 fees, and other trail commissions and more. Clients are not seeing that from brokerage firms now. That kind of transparency brings costs down.”

Finally, Ms. McBride outlined the intense anti-fiduciary lobbying campaign: “There is so much money at stake that banks, insurance companies and brokerage firms are spending hundreds of millions of dollars to derail the fiduciary mandate. The broker-dealer wirehouses, insurers, and lobby groups are pounding regulators and Congress. Congress has responded with a bill and letters to the SEC and DOL calling for a delay or dismissal of the efforts to put investors first.”

Mr. Wasik concludes his article in the following way: “Fiduciary duty may not be the ideal way to cut down on the worst abuses in financial services that produce churning brokers and Bernie Madoffs, but it’s a better approach to align advisers with the best interests of investors than all of the other commission-based business models. It’s clearly a quantum leap forward for investor protection.”

We salute Mr. Wasik and ForbesForbes calls itself “The Capitalist Tool.” We’re pleased that they have taken a tough stand to speak out against Wall Street bankers, brokers, and insurers in favor of investor protection and the fiduciary duty. Yes, capitalism can have a “soul.”

At DWM, we, of course, support the client-centric business model and embrace the responsibility of fiduciary duty. We may not make as much money as the brokers, but it’s really not about our money, it’s about yours.