I like Ric Edelman. I came into the profession as a fan of his books and they sparked my interest in personal financial planning.
I don’t agree with all that he has to say, but respect his skill at communicating, innovating and the clear importance he has placed on financial planning.
However, his books also developed my passion to provide clarity to personal finances, and one of the greatest places I find confusion among the advice-seeking public today is related to the words “fee-only” and “fiduciary.” Just about every prospective client I meet use the terms, nearly none know what they mean, though all believe they do.
So, it has been slightly disappointing to see regular misuse of the terms from a planning giant, which I first noticed with his Fiduciary Distribution Review marketing scheme (see my article on the day the word ‘fiduciary’ may have lost meaning for the public) and lately several references to Edelman Financial Engines as a “fee-only” firm.
An important part of our job as advisors (and fiduciaries) is to make clear what we offer, so that a client can judge the value for the cost across their various advice options.
Is Edelman Financial Engines Fee-Only?
Despite claiming to be fee-only in the press and throughout their ADV2B disclosure form, we also find in the form:
Clients working with an Edelman Financial Engines planner who request an insurance solution may be directed to an affiliate, TMFS Insurance Agency, LLC or the Insurance Department of EFS, LLC to obtain life, long-term care or disability insurance. Clients might also be referred to other relevant, non-affiliated third parties in specific situations as circumstances warrant. Edelman Financial Engines planners do not receive commissions or fees as a result of making such a referral, although one of FEA’s affiliates might in some circumstances.
One place we can look for guidance on the definition of “fee-only” is CFP Board’s new Code of Ethics and Standards of Conduct. The firm’s CFP® certificant advisors can not refer to themselves as “Fee-Only” due to “related parties” that receive sales-related compensation. In searching CFP Board’s database, I found a few advisors listed who refer to themselves as “fee and commission,” which seems likely to be the appropriate CFP Board categorization.
From CFP Board’s Code and Standards:
A CFP® professional may describe his or her or the CFP® Professional’s Firm’s compensation method as Fee-Only only where: (a) the CFP® professional and the CFP® professional’s Firm receives no Sales-Related Compensation; and (b) Related Parties receive no Sales-Related Compensation in connection with any Professional Services the CFP® professional or the CFP® Professional’s Firm provide to Clients. CFP Board does not prohibit the term “Fee-Based,” but instead makes clear that Fee-Based is equivalent to “commission and fee,” and sets requirements for using the term.
We can also look to The National Association of Personal Financial Advisors (NAPFA) which “defines a Fee-Only financial advisor as one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product.”
Edelman Financial Engines’ Form ADV lists multiple associated insurance agencies – one being Edelman Financial Services, LLC – and a brokerage firm. These related parties most likely sell products. Therefore, despite the fact that the only service Edelman Financial Engines offers directly is paid by a fee, the ultimate owners may benefit from referrals made to the affiliated companies.
While Edelman himself is not a CFP® certificant, he employs many who are, and who can not represent their work as fee-only by the industry definition of the word.
Is Edelman Financial Engines a “fiduciary”?
Legally, yes. And while Edelman seems to be marketing their services using the word “fiduciary” more today after merging Financial Engines with Edelman’s prior firm last year, as a Registered Investment Advisor they always were one. RIA firms are fiduciaries by law, even those whose advisors sell products like insurance.
While some believe that individuals who sell insurance or other commission products or services, or own firms who do, can not be fiduciaries due to having a conflict of interest, I don’t believe that to be true. According to Don Trone “Father of Fiduciary” and co-founder of 3ethos the answer to the question if insurance agents can work in a fiduciary process the answer is, “Absolutely.”
“There’s a lot of misnomers associated with the fiduciary standard. When you define practices associated with a fiduciary standard, practices such as identifying the client’s goals and objectives, communicating a strategy back to the client, having a due diligence process for selecting investment options or investment products, monitoring the strategy on an ongoing basis, [and] more importantly taking responsibility for communicating to the client the fees and expenses associated with their investment strategy. Can an insurance professional meet that standard? Absolutely.”
“The other misnomer out there is that a commission – in and of itself – is a fiduciary breach.”
According to Trone, to meet a fiduciary standard an advisor must:
- Disclose all fees to the client,
- Show every party that has been compensated from those fees and expenses.
- Demonstrate to the client that the compensation is appropriate.
And so, while there may be a referral to an affiliated insurance agency or agent, a firm that has a process in place to manage conflicts can act in a fiduciary manner.
It’s the process that matters to being a fiduciary.
When prospective clients ask me, Are you a fiduciary?, I used to simply answer in the affirmative. I knew they meant then, “Do you adhere to and have processes that ensure decisions are being made for my interests alone?”
Today, with the confusion that many are causing regarding the word, the more important question I try to educate them to ask is not the one everyone will say “yes” to today, but rather to ask about their fiduciary processes and how the client can be assured such processes exists.
Which, is why I believe the marketing a Fiduciary Distribution Review is likely to cause more harm to the understanding of “fiduciary” advice than good. According to a recent article in ThinkAdvisor, Edelman states, “the jury is out on what this will actually look like.”
(He also states in the article that “there are a lot of buggy-whip manufacturers that will be put on notice” in an analogy that suggests a new marketing channel is equivalent to the automobile replacing horse-drawn carriages… Ric, advisors together are all manufacturers of buggy-whips or Model Ts or whatever products you choose, some just can and do market them bigger!)
In other words, it sounds as if the Fiduciary Distribution Review has come before the creation of the fiduciary process. A new way of marketing the cart was just once again put before the horse.
But, without a process or anything new to the end advice given to clients, buggy-whip manufacturers like myself are left wondering if the only thing consumers will experience is more confusion than these analogies must be creating for the reader!
It is yet to be known if there can be a true fiduciary standard reached from this service, or if as I wrote about the Fiduciary Distribution Review service previously it will lead to the creation of a lower level “fiduciary.” A single review meeting to discuss a decision that requires far more work to reach many fiduciary standards, may not be able to do so. Many experts believe that the DOL’s “fiduciary” standard related simply to rollover advice would have cost consumers in the thousands of dollars in terms of advisor wages if implemented per rollover. For a CFP® certificant to provide advice, their proposed fiduciary standard also suggests more work must be done, which to my understanding likely requires work very near a complete financial plan.
Whatever the outcome, it certainly will add to the confusion of what the public sees a fiduciary financial advisor as, given the different standards. Just as Edelman Financial Engines’ definition of “fee-only” will as well.
I don’t offer this article as a criticism of the good work that the advisors of Edelman Financial Engines do every day. However, it’s important that advisors clear up, and not add to, confusion for the public.