Real Financial Life

What It Means To Be a Real Financial Advisor

Episode Transcript

Greetings. This is Carl and you are listening to The Podcast for Real Financial Advisors all over the world and I want to talk about that statement, real financial advisors, there. I get asked about this like, “What does that mean? What does real financial advisor mean?” There are some really important things that it means and then there’s a bunch of supporting stuff that I feel really strongly about, but isn’t critical. I want to separate the two for a minute. Here is what it means. A real financial advisor at the very, very, very least is at least two things and I think … Let me run through those two and then there may be a third that I want to talk about. Number one, a real financial advisor puts their client’s interests ahead of their own.

I don’t care how you’re regulated or what you call yourself or where you work. That is a requirement for being a real financial advisor. At least you act like a fiduciary whether you can call yourself one or not. I have friends at big brokerage firms that cannot call themselves fiduciaries, but they act like one and I would send my mom to them. I know people who run independent firms with all the right titles and are indeed regulated as fiduciaries, but don’t act like one. Look, I think everybody knows I have a bias towards independence and being regulated as a fiduciary. Of course I do, but I want to put that aside. That argument is I’m glad people are fighting that fight, but it’s not my fight right now.

My fight is no matter where you’re regulated or what you can call yourself, you at least act that way. You put your client’s interests ahead of your own and as part of that, you are open about real or potential conflicts of interests. No matter how you bill or no matter how good you are, no matter how honest you are, there are always conflicts of interests anytime money is changing hands, right? Anytime you’re paying for a service, there is a conflict. We just need to be open. Real financial advisors are open about this. That’s sort of under heading one. Heading one could be called you act like a fiduciary. What it really means in real language is you just put your client’s interests ahead of your own and/or your firm’s. Number two is that you are completely …

It could be part of number one, but I like it as a separate one because it’s so important. You are completely open and transparent about your compensation. Now there’s various forms of arguing about this, but there’s just no way to get around it. A client needs to know how you are compensated at least based on their relationship. I don’t necessary mean you need to disclose your income to them, but at least based on their relationship, they need to know two things. These are very important and they’re separate. I’ve been teaching people around the world to ask you these questions because I know from you that the real financial advisors around the world love these questions. Not only do they love getting them, they may initiate them. The two questions that a client should be asking and they need to know number one, what do they pay? What is their fee?

What are they charged? Like the total. What is it costing them? Number two which is a separate question and can often be a different answer. Number two is what is the advisor getting in terms of compensation for their relationship? Now in a perfect world, those two answers are the same. I used to say all the time, if my financial planning firm had an income statement which it did, you would see one line item under income and it’s fee from clients. The only thing I get paid on your relationship is the fee that you pay me and I know many of you operate that way and maybe that’s the ideal world. There are some legitimate scenario where there are different things. It could be that a specialized life insurance product that actually fits the client’s needs and there are some really rare cases where that is indeed true. Not the general rule, but it can happen.

There is no fee-based version on that product and the only way for you to get … The best products you can find for the client is a commission product. I’ve seen that happen. Look, fine, as long as it’s completely disclosed to the client. If explained correctly, the client of course is going to understand. Look, we could have gotten this one over here that pays me a stated fee, but it wasn’t as good for you and this one over here is better. My point is real financial advisors … The second thing, second requirement for a real financial advisor is that you are open and honest about discussing the client fees and your compensation for that relationship. Again it doesn’t necessarily need to be client’s business what your total income is or what your net income that take home is, but it is their business to know how you’re getting compensated for their relationship and what they’re paying if you’re a real advisor.

Fake ones. Whatever. Do whatever you want I guess. Real ones welcome that conversation. Now I think there’s a third one. I think the third one is around investing. I think that it’s important that we talk about it. Those first two are non-negotiable for a real advisor. The third one I still am thinking about this and it’s been a decade long thought process. The third one is that you invest based on data and evidence, not on stories and friends. I state it that way and of course it’s a requirement, right? That’s just up to so much interpretation. It’s really hard to nail down what exactly it means to invest on data and evidence and not stories and friends. I think you know what I mean and if you know what I mean, then it’s a requirement.

I just don’t want to make that a requirement because who am I to be the judge of what that means. The other two it’s really easy, right? Well, conflicts of interest aren’t always easy to sort through, but putting your client’s interests ahead of your own is pretty clear cut that that’s important. I know it can occasionally get a little in the areas of gray for sure. Anyway, I don’t know about the third one. I do know the first two. Put client’s interests ahead of your own and be totally open and transparent about compensation and fees with clients. Now the Society of Real Financial Advisors, I started that using that phrase … 2008, right? 2007 or 8. It was probably 8. Maybe it was even 2009, whatever. It’s getting close to a decade ago, eight or nine years ago I started using that phrase.

People have been asking me if they can join ever since. Like how do you become a member? My qualification for the first five years was just would I send my mom to you? The two requirements for that were … Well, actually those three that I just mentioned that you act as a fiduciary, you’re completely transparent with compensation and fees and that you invest based on data and evidence and not friends and feelings. Those are my three requirements. I mean I was trying to get to like are you honest? Would you treat me mom the way I would treat my mom? That’s what I was trying to get to, so those three requirements. At some point here in the future I think we need to organize a little bit more. I’ve got a logo built. I want to make some t-shirts, some hats, a place for us to all communicate and talk. Keeps your eyes open to that.

Again, we always love your feedback. The email address to email the team here is down below in the show notes. Shoot me an email. They all get read. Even if they don’t all get responded to, I get … I don’t need to. Anyway, I get hundreds and hundreds of emails about this stuff and I read every one of them. Even if you don’t get a response, know that they’ve been read and I really appreciate them. Let me know what you think about the qualifications for real financial advisors and even your ideas on how we should organize. Talk to you soon.

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