Full-time fiduciary — make sure they are full time fiduciaries, not advisors with both fiduciary and commission sales licenses. There are three kinds of advisors who say they are fiduciaries: 1) those that lie to draw you in, 2) those that are devoted fiduciaries who always act in client’s best interests, and, the most common, 3) the ones that hold both sales and fiduciary licenses, and may “forget” to tell you they switched to a commission sales hat after convincing you to trust them as a fiduciary. For an article I wrote on how to tell, click here. Here’s a true story, about “Alice.” When we met her, she was with a major broker-dealer firm. When I pointed out we were a fiduciary firm, she said “oh, my guy’s a fiduciary.” I said, “let me see your statements,” when she did, I noticed $1M in a clearly high-commission annuity. She said, “call my guy.” I asked “are you a fiduciary?” “Oh, yeah!” he said. “Don’t you sell on commission?” “Not for her,” he said, “fees only! Have to put the client first!” I said, “what about this annuity?” His answer — I kid you not, was “oh, except for that!” Alice had no idea about any “except for that…” She trusted him to always act in her best interests, but shouldn’t have. But her guy put a ton of her money in his pocket over lunch, and she had no clue, and got buried.
As part of our series about what one should look for when hiring a financial planner or adviser, I had the pleasure of interviewing Dr. Jeff Camarda. Jeff’s an award-winning PhD in financial and retirement planning. Noted for years in Barron’s, Forbes, the Wall Street Journal and elsewhere, Jeff’s completed the CFA®, CFP, ChFC®, CLU®, CFS®, and BCM™ professional designation programs, and is an EA tax expert admitted to represent clients before IRS. His financial advisory firm, Camarda Wealth, is BBB A+ rated, and specializes in portfolio management, retirement planning, estate and asset protection planning, tax reduction, and advanced financial planning and wealth management. Jeff’s passionate about protecting consumers by professionalizing financial advisory practice. He’s an active academic researcher into advisor education, ethics, misconduct and professionalism, and writes a regular column for Forbes.com. Jeff and partner/wife Kim live in greater Jacksonville, FL with their sons. Jeff is active in Scouting at the Board and unit levels; son Dylan made Eagle at 14, and Dante is following hard in his older brother’s footsteps. Jeff and Kim enjoy art, travel (especially to Italy!), gardening, and boating, having run their powerboat “Perfect Partner” all over Florida and to the Bahamas many times. You can follow him on Twitter, LinkedIn, or his blog, or email directly.
Thank you so much for doing this with us! Our readers would love to ‘get to know you’ a bit more. Can you tell us a story about what brought you to this specific career path?
Sure! I was an unemployed graduate chemist in the early ’80s and answered an ad to become a stockbroker. They gave me some books and a week to pass the Series 7 stockbroker’s exam, and fortunately, I passed the first time. I followed the training, learned how to sell, and was soon amazed at the high income I was able to earn as a kid in my 20’s. After a few years’ experience, I became disillusioned that my clients were not doing as well as I thought they should, and left the brokerage world to learn financial planning, where I thought I could make more of an impact.
Back then, the life insurance companies were where financial planning was “at.” I buckled down, went through the CFP/Certified Financial Planner, ChFC®/Chartered Financial Consultant, and CLU®/Chartered Life Underwriter programs pretty much non-stop, I listened carefully to my trainers and mentors at the big life insurance companies I worked for in the ’90s, and before long enjoyed great success selling the products they told me would really help the families I served.
But as I worked through the CFA®/Chartered Financial Analyst program and really learned investment and financial analysis, that old sinking feeling I had as a broker was back — I was doing really well, but my clients were not doing as well as I thought they should. This was during the great bull market of the late ‘90s.
I lost faith, and burned out.
If you’re an ethical person, you can’t sell what you don’t believe in.
In ’98, I knew I had to give up a good commission income, and try to build a fiduciary fee practice from scratch.
It was scary as hell — I had three young kids in private school at the time — but was one of the best and most satisfying decisions I’ve ever made.
Can you share a story about the most humorous mistake you made when you were first starting in the industry? Can you tell us what lesson or takeaway you learned from that?
About the time I went fee/fiduciary, I was using “value priced” retail office space. This was in a decent part of town right across from the police station, and we made it nice inside, but it was a 1950’s block building and the outside looked, well, tired.
A new client — now a very old (don’t tell her I said that!) and dear client — was put off by the look of the building. Later, as we became close, she confided something like ”I’m so glad I went with you…but that first day…when I saw your building…I almost didn’t get out of the car.”
The takeaway is that in all things, appearance and image are important. People often make very serious, subconscious-steered decisions on limited or erroneous information, as Kahneman points in the great popular book, Thinking, Fast and Slow. Too often, humans make screening decisions by “thinking fast” to save time, but this leads them to bad decisions. What served primitive humans well in the forest for hard-wiring millennia works not so well on 5th. All investors are encouraged to read this wonderful book — the stuff is so important to financial decisions, by the way, that Dr. Kahneman — a psychologist — won a Nobel prize in economics for the theories.
So, the lesson for advisors: pay attention to image detail — one off-putting aspect, and potential clients may “think fast” about your tiger stipes and never dig deep enough to find out how good you really are. For investors: don’t judge a book by its cover — take your time, do research, and “think slow” to better decisions. Maybe those were harmless zebra stripes, but it was dark, so why take a chance? The thing about largely unregulated financial advisors in the US — from the best to the dangerously ignorant and sociopathic- is that we all can look great in a suit! So take your time and check it out!
Are you working on any exciting new projects now? How do you think that will help people?
Yes, a couple actually.
From an academic perspective, my co-researchers and I are beginning a national study looking at the relation between CFPs — Certified Financial Planners — and misconduct and other client-abusive behavior. In my dissertation research a couple years ago, I studied some 27,000 advisors — basically the entire advisory population in Florida — and found that a consumer picking an advisor by “thinking fast” and just keying on the CFP actually had over a 3.5x worse chance of getting a problem advisor. This was a big surprise, given CFPs higher training, ethical code, and the CFP Board’s “highest standard” and “thoroughly vetted” claims. The Wall Street Journal recently reported that thousands of CFPs listed as “clean” by CFP Board and “bearing the board’s seal of approval have had customer complaints or faced criminal or regulatory problems — often directly related to their work with clients.” People work hard for their money, and need it to work hard for them. We think these studies are really important to help people pick quality advisors for their retirement and general wealth care. I am extremely passionate about professionalizing the financial advisory industry, which is really just a horrible, generally- predatory, mess. As I suggested to Barron’s when they interviewed me on this, planners really need to be regulated by states like doctors and attorneys, but we are a long way from that.
From a practitioner perspective, I’m excited to be developing an estate, tax, and asset protection planning expert system to help advisors prescribe sophisticated trust and other solutions with minimum head-scratching but a high degree of accuracy. Financial planning software is good for retirement projections, asset allocation, and insurance, but this other stuff is so complicated and situation-specific that the commercial software we’ve seen doesn’t come close to doing a good job. It can take years to get up to speed. Just today I spoke to a really smart and ethical estate attorney in NY who had never heard of an important trust type that can save clients millions in estate taxes. The learning curve is so steep that this is traditionally done by “advanced” planners like me, expert lawyers, and others, by “hand” — using our brains, a calculator and legal pad. My team and I are in the process of writing the logic rules that can help less learned advisors, know, for instance, when using an LLC for asset protection makes sense, or a Q-TIP or SLAT trust is indicated, by using a simple check-the-box client interview system. We see a lot of mistakes in these areas all the time, and think such an expert system can really improve the quality of wealth care for many consumers.
Are you able to identify a “tipping point” in your career when you started to see success? Did you start doing anything different? Is there a takeaway or lesson that others can learn from that?
Well, if you define success as making a real difference in clients’ financial lives, I would have to say that happened about halfway through my CFA® studies. The CFP, CHFC®, and CLU® programs gave me a good basic understanding of the elements of financial planning, but all only touched fairly superficially on investments. Before the CFA® program, I thought I knew a lot more than I did, but after three years of intense study, I felt utterly transformed as a portfolio manager. Instead of relying on my employers’ expertise and recommending what they suggested, I was equipped to think critically for myself. That has made all the difference.
In my case, a dedication to lifelong financial learning has been a real key. Learning enough to be really, really good at financial planning is a challenge, but one that can help make a huge difference in the lives of clients. The physicians’ model is a good example. It takes years and years to learn the mastery to be competent working on very complex systems like human bodies, but that’s what good medicine takes. Financial planning, well done, is no less complex, but nearly anyone is allowed to do it, so long as they can pass fairly basic government licensing tests, and stay of jail.
What three pieces of advice would you give to your colleagues in the finance field to thrive and avoid burnout? Can you give a story or example?
1. Get real about the fiduciary thing. The real fiduciary thing, not the fiduciary-bait and commission-switch thing. Give up sales licenses, and commit to the fee-only model. It’s not perfect, but much better aligns your interests with what’s best for your clients. It makes you lots more objective in decision making. You’ll probably take an income hit early on, but in the long run it will be worth it. You’ll feel better about yourself, and you’ll make more. Beyond better aligning your goals with clients’, the comp model will get you more personal lifestyle freedom as well getting off the “you’re only as good as your next sale” and “I don’t have time for you I sold that last year” treadmills.
2. Commit to applicable, lifelong learning, and obtain the CFP, CFA®, and a graduate degree in financial planning. Minimum! Get into it! These three will give you a solid education to help people, and position you as a real expert. The study can provide a welcome break from business pressures, and the knowledge can help make your clients — and you! — much wealthier.
3. Love your clients and make them part of your family. This is really a major key. There’s an old saying, “they don’t care how much you know until they know how much you care…” Not only is caring about your clients good business, taking care of them because you care about them and their families is incredibly gratifying on a deeply emotional and humbling (in a good way) level. We tell our clients we think of them as family…and we mean it. The bonds and emotionally enriching experiences that develop are truly incredible. This is nearly impossible at the Big Financial advisory shops, but very manageable if you make it a priority.
Ok. Thank you for all of that. Let’s now move to the core focus of our interview. As an “finance insider”, you know much more about the finance industry than most consumers. If your loved one wanted to hire a financial advisor (not you :-)), which 5 things would you advise them to find out about before committing? Can you give an example or story for each?
That’s really a great question. Here’s the advice I give my three daughters and two sons:
1. Full-time fiduciary — make sure they are full time fiduciaries, not advisors with both fiduciary and commission sales licenses. There are three kinds of advisors who say they are fiduciaries: 1) those that lie to draw you in, 2) those that are devoted fiduciaries who always act in client’s best interests, and, the most common, 3) the ones that hold both sales and fiduciary licenses, and may “forget” to tell you they switched to a commission sales hat after convincing you to trust them as a fiduciary. For an article I wrote on how to tell, click here. Here’s a true story, about “Alice.” When we met her, she was with a major broker-dealer firm. When I pointed out we were a fiduciary firm, she said “oh, my guy’s a fiduciary.” I said, “let me see your statements,” when she did, I noticed $1M in a clearly high-commission annuity. She said, “call my guy.” I asked “are you a fiduciary?” “Oh, yeah!” he said. “Don’t you sell on commission?” “Not for her,” he said, “fees only! Have to put the client first!” I said, “what about this annuity?” His answer — I kid you not, was “oh, except for that!” Alice had no idea about any “except for that…” She trusted him to always act in her best interests, but shouldn’t have. But her guy put a ton of her money in his pocket over lunch, and she had no clue, and got buried.
2. Total costs — it’s really important to understand how and what you pay, and what services you get for it. Sometimes, commission reps may skirt the issue, saying something like “oh, you don’t pay me any commission, I’m paid directly by the company!” implying a salary relationship that may not exist. Often, this translates into “I give your money to the company, and they give part of it to me…you get what’s left.” Do you get ongoing investment management? Financial planning? Tax help? An estate plan? How often will you be contacted, and your planning updated? Best to be sure, and get it in writing — everything you pay, and everything you get. For Alice, about, we estimate the rep made a cool $80K on the sale, and Alice was saddled with big penalties if she got out and 6% or $60K a year if she stayed in.
3. Degree of training would you want to see a doctor who hadn’t gone to medical school? If you practice medicine without a license, you commit a crime, but pretty much anyone can call themselves a financial advisor, even if their training only amounts to a few years at the dog track and a few weekends of life insurance license school, over at the Motel 6. As mentioned, at a minimum I would seek an advisor with at a CFP, CFA® and a Master’s or higher degree in financial planning. I would also strongly prefer one with a tax credential like CPA, EA, or a tax attorney — and who doesn’t have a blind “you gotta pay your taxes I don’t need to study the tax law” attitude. I call tax the master wealth skill, because effective tax control can make such a huge difference in client wealth. Yes, I know that’s a lot to ask, and you probably won’t find an advisor like this at your local bank, brokerage or Rotary. But we are out there, lots of us and more every day, and it is worth looking and not settling, because the difference in wealth growth and protection can be huge if you get the right advice. Early in my career, after I’d completed the CFP training, a client told me a competitor had told them “I know more than he does — my designation (the LUTCF) has five letters, his only has three.” His, by the way, was actually a life insurance sales course, which “focuses on fundamental prospecting, selling and practice management skills.” Nice, but not exactly the skill set the clients were looking for, even if he did have “more letters.”
4. Scope of knowledge and service Most folks seek out advisors for investment help, so I think it critical an advisor have the CFA® investment expert designation. Others like CIMA® are more investment focused than the generalist CFP, but CFA® is the global standard. Beyond this, is the advisor expert in all the areas you want and need? Tax? Estate and trust planning? Asset protection from financial predators? Business financial planning? Insurance? Detailed retirement income modeling and funding? We recently saw a case where a $5M 401k plan was being “managed” by a life insurance agent, the friend of the owner’s wife. The plan had all kinds of hair on it — regulatory violations, poor performance, high fees, and sky-high liability for the owner as trustee and investment fiduciary. Both the owner and the agent “didn’t know what they didn’t know” but the costs, risks, and damage to dozens of employees retirements was significant.
5. Clean record? — don’t just go by the letters! Remember the thousands of CFPs red-flagged in the WSJ investigation. You have to “think slow” and do your due diligence to improve the odds of getting an honest planner. Brokercheck’s a good place to start, as well as the CFP and CFA® sites to check for public discipline. You just don’t know unless you dig into the details. When running background checks for potential clients, we’ve found them using advisors with burglary and assault convictions, numerous customer complaints, fines, license suspensions, all kinds of stuff.
6. Personal net worth finally, consider asking the advisor for a personal balance sheet. Why not? They’re going to ask you for yours! You probably don’t want an advisor who’s gone bankrupt or has trouble making their mortgage payment. Besides wanting advice from someone who can build their own personal wealth — if they can’t do it for themselves, how can they for you? — their own financial pressures could drive them to make recommendations more in their own interest, than in yours. As the old broker said in the movie Wall Street, “that’s the thing about (needing) money, Bud; it makes you do things you don’t want to do….”
I think most people think that financial advisors are for very wealthy people. This is likely not actually true. Can you explain who would most benefit from hiring a financial advisor and why? Can you give an example?
The financial world has become so complex, and the social pension bargain so illusory, that quality wealth care is needed by nearly everyone. Here are two extreme examples from my recent practice.
A fellow came in looking for help today, disabled, who had recently retired in his 40’s from AT&T. His liquid assets total a pension IRA rollover of about $130K, and a $30K death benefit from his recently-deceased mother. He has no idea what to do, “should I just spend it all, easy come easy go?” This is playing with fire. Not only is this his only rainy-day nest egg in case of trouble in the many years ahead, but he did not appreciate that pulling it all out in one year is tax suicide. Worse, without good advice he is likely prey for a high-commission sales rep, who might bury him in a high-cost annuity and “earn” as much as $20K for a hour’s “work.”
At the other extreme is a retired CPA — who should know better! — with a net worth of about $50M. Of course, this situation is much more complex, but here are several important highlights. First, while he and his wife had a lot of “names” in the portfolio, stocks, mutual funds, and ETFs, and so on, when we stress- tested we found many of them invested in similar things, creating concentration risk with the illusion of diversification. There could have been an elevator ride down in their future. Second, there were a lot of bonds that had been accumulated at premiums in recent years, but they did not realize these would mature to less than was invested, essentially creating guaranteed losses. Third, while they had had estate and trust planning done by a big-name local law firm, the estate tax exposure was completely missed, and the planning essentially inappropriate. I remember telling them “you have an estate plan for a two-million dollar family.” We showed them how to pretty painlessly save well over $10M in estate tax using the right kinds of trusts. They also needed trust protectors to insulate their daughters from divorce and other risks. Lastly, most of their money was not in asset protected buckets, making it low hanging fruit to satisfy a judgment if they got sued for a car wreck with a football player or something. The right LLC structure made these assets nearly bulletproof, beyond the liability umbrellas they also needed. Cheap, easy, but frequently missed stuff that costs families big long after the names of the drafting attorneys are forgotten.
None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?
I’m quite fortunate to have had many wise and generous mentors over the years. If I had to pick just one, it would be Wade Pfau, a Princeton PhD (economics), one of the country’s leading retirement researchers, and my dissertation chair for my own PhD. Going through a PhD program is no walk in the park. It is one of the most enriching things I have ever done — I call it Jedi training for the mind (for logic, not telekinetics!) — but it can be a brutal road without a caring guide. Wade is brilliant, generous, collegial and Socratic — and I will be forever in his debt for his intellectual leadership.
You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. 🙂
Shucks, thanks so much for saying that. Probably the biggest professional and academic passion of my life is helping to professionalize the advisory industry. America — from those of us with the most modest to the most expansive levels of wealth — needs quality wealth care. The stakes are huge — to retire well, to afford the health care that can extend and enrich their lives, to take care of their families, and to avoid burdening government and society with the consequences of poor wealth decisions, which just empties the pockets of the rest of us, of course. But there is no wealth care profession. The vast majority of advisors have nominal training, no real education, no requirement to put their clients and their families before their own compensation, and can have crushing incentives and insurmountable conflicts of interest dangled by Big Financial to drive Big Tobacco-like profit margins. There are plenty of good advisors out there, but they are good because of their personal character, not because there is a professional “better watch out” standard. The first reason is good and it works for me, but human nature being what it is, our country really needs the second.
How can our readers follow you on social media?
Thank you so much for joining us. This was very inspirational.