Declaring Independence

Independence Day and the days around it have been a time of reflection for me in recent years. It was just about five years ago that I declared my own personal independence by resigning from the brokerage industry where I had worked since 2003.

As you can imagine, this was a difficult decision to make. I was the primary earner in our family and our two kids, ages 8 and 12 at the time, needed more stability than typically comes with a parent starting a new business. But it was (and is) important to me to work with clients more effectively and, following many discussions with my amazing wife, we decided it was worth the risk to go out on my own.

After feeling the swift kick from my employer when I resigned, I got to work and after a few rough months I was up and running full steam. One of the first things I did was to join a group you’ve likely heard of, the National Association of Personal Financial Advisors (NAPFA). This is an elite group and I had my sights set on membership from the very beginning.

To be a NAPFA member you must:

  • Be a Certified Financial Planner in good standing
  • Provide holistic financial planning services
  • Work in a fee-only capacity (receiving zero commissions or other monies from third parties)
  • Sign a fiduciary oath

After applying for membership and submitting a financial plan for peer review I was granted membership a few months after I started my practice. Since then I’ve been doing my continuing education (another requirement) and have generally been plugging along working with clients.

NAPFA membership is critical because, among other things, it’s a statement of independence from the brokerage industry and shows a commitment to working with clients in a straightforward way. While this might sound like a no-brainer, the broader industry is still incredibly far from where I am, even with recent regulatory changes.

You’ve likely heard about how the Department of Labor during the Obama Administration had tried to create a “fiduciary rule” to govern the sales activities of brokers. This looked set to pass but was ultimately trashed by the incoming Trump Administration. Then in recent weeks the Securities and Exchange Commission (SEC) came out with its own rule, the strangely named “Regulation Best Interest” which is, essentially, a watered-down version of the fiduciary rule. 

While the rule’s stated goal is to increase transparency and impel brokers to work in their client’s best interest, the impact will take some time to play out. For example, “best interest” provisions in the rule allow brokerage firms a lot of wiggle room to simply add more language about conflicts of interest to disclosure documents that nobody reads anyway.

My fear (and yes, I’m a bit cynical about all of this) is that this new rule will allow brokers to offer the same conflicted services to clients under the guise of doing so in their best interest. And they’ll be able to point to government regulation that says it’s true. This will likely serve to further confuse investors in an already complicated landscape. (Interestingly, the SEC’s own focus group testing showed how confusing the rule changes were but kept them anyway. Go figure.)

This is another opportunity for me to remind you that I’m a fiduciary when we work together. This is both a legal commitment and an ethical one. I’m always working in your best interest and try to limit conflicts when we work together. 

As I see it, my main conflict has to do with being paid by my ongoing clients based on the dollar amount I manage for them. If the client wants to pay off their mortgage using money from their portfolio, for example, in theory this reduces my income and creates a conflict of interest. In practice I get ahead of this by simply not thinking about it. Seriously. I specifically don’t consider the reduction in my income as part of the decision-making process. If it’s the right thing to do from a planning standpoint, it’s the right thing to do. Period.

I’ve helped many clients pay off their mortgage or take other money from their portfolio in recent years and all the while my business has grown. Simply put, I would rather have a happy client with a smaller investment portfolio and no debt than a stressed client with the opposite.

I don’t know where this recent rule change from the SEC will take the brokerage industry, but wherever it goes will likely still be far from how I work with clients. I’m just glad not to be part of it anymore. Independence is a beautiful thing.

Have questions? Ask me. I can help.

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