Language-Fail in the Land of Financial Planners

Friday, November 2, 2012 at 2pm
By John Friedman

Did you know that there is a big difference between a fee-only financial planner and a fee-based financial planner — that this simple, single-word swap of the word only for the word based means a great deal in the land of FPers?

No? Well, you can read all about it on the Internets Tubes via the Googles, and also in the brief summary a few paragraphs down below.

And did you know that, in general, the F-O FPs do not look kindly at all upon the F-B FPs and vice versa, and also that there is a gosh-awful regulatory and legislative big-time rumble going on between the F-Os and the F-Bs (and, for that matter, also the B/Ds and the RRs and FINRA and the SEC and the Dems and the Repubs and the lobbyists, and the list goes on and on and on . . . )?

No, right?

Pretty much no one outside the industry knows this stuff: it’s inside baseball and quite technical and boring to most (hence no links to the details), but it’s inside baseball that just so happens to touch every single person’s life, at least tenuously and often significantly, because the baseball we’re crawling inside-of constitutes a decent-sized chunk of the Financial Services Industrial Complex, and because the FSIC touches every single person’s life (except for those like the late Chris McCandless) every moment of every day.

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Briefly, the fee-only folks make their money via nothing but . . . wait for it . . . fees, while the fee-based folks earn commissions as well as fees.

In practice, what this usually means is that fee-only folks make their money by charging Assets Under Management fees (typically in the neighborhood of 1% per year of the money they’re managing for you) while the fee-based folks are usually happy to go the AUM route (it is, after all, a very sweet business model), but also are happy to sell you insurance and annuities, and many are also happy to buy and sell for you stocks and bonds and private placements and other products — all of which generates commissions for the fee-based financial planner.

And, oh, the commissions! Ask the insurance agents in your life what their percentage commissions are . . . because I’ll bet you dollars to donuts they never offered up that information (note that Friedman’s Law of the First Thing, as applied to the initial courtship at the front end of a commercial relationship, is that you should never do business with anyone who either actively or passively, at any time, hides from you the amount of his or her compensation).

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Now I spent a bit of time trying to figure out how these F-O vs F-B labels came to be, and who came up with them, but my search came up dry. I think I once heard about how it all came to be, but the recollection is all fogged over . . . (please let me hear from you if you know the origin story).

But I *can* tell you this: the labels are total failures. I have never, ever met anyone who knew the distinction (other than people in the business) and, what’s worse, I have never known anyone who, after learning about the distinction, could explain it to you an hour later, let alone a day later.

Yet the financial planning industry by and large makes its bed with these labels and with this unhelpful language.

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And how about the also confusing language of investment advisors vs. financial planners? That’s another one that’s not doing people any favors in terms of one of the important functions of language, i.e., providing useful shorthands that are easy to remember, and that replace long unwieldy language.

Today, constrained by time as I am,  I have but two things to say for now on this topic (and many more in the future).

First of all (and I do truly love this fact), investment advisors can’t even agree on how to spell the word adviser/advisor!

This much is clear: if you look at the laws that apply to our work, they all use the version with the E. So, too, for the spell checker built into the software into which I type.

A lot of us, though, including me, use the O version. I don’t know precisely why, but I just like the O version better (just because . . . ). And all the language enforcers out there say that either version is acceptable.

So we start with a word that is, spelling-wise, two-faced, ambiguous and ambidextrous.

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Second of all, many (most?) people do not understand the difference between financial planners and investment advis[oe]rs.

For example, when I tell people that I’m a financial planner, the thing that at least half of them hear me saying (literally hear me saying, as best I can tell) is, I’m an investment advisor, judging by the fact that the first thing out of their mouths is, What should I invest in? and Where’s the market going?

Chalk up a victory for the part of the Financial Services Industrial Complex that butters its bread via people focusing laser-like on investing — and a big fail for people like me who will tell anyone willing to listen that investing, while often playing an important role in many people’s overall financial well-being, is, more often that not, *not* in the Top 5 determinants of their overall financial well-being (numero uno, I say again, and as I will say again and again and again, is savings rate).

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To begin laying out the confusing state of the language, let’s start with this startling piece of linguistics-meets-regulations gymnastics: financial planners just about always have to be regulated as Investment Advisers, even if they don’t directly manage money for people.

To give you an example close to home, I do not directly manage money for people, but because I do give advice about how to invest, and do so in some detail, I am regulated as an Investment Adviser.

As it happens, a lot of people who do nothing but manage money for people and are compensated via Assets Under Management fees are also regulated as Investment Advisers (if instead someone simply executes buy and sell orders for customers, and is compensated via commissions for doing so, then s/he is acting as . . . sorry to have to lay this whole thing out, but this is the language . . . a Registered Representative of a Broker/Dealer, which is what most people call a stock broker).

Financial planners, on the other hand, help people plan — they help them figure out where they are, where they want to go, and how to get from here to there. Technically, if they never talk about investments, they need not be subject to any licensing at all, though, in practice, most financial planners are compensated via Assets Under Management fees and earn their keep via managing money).

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With that I’m over my word limit, and so I’ll have to save for another day — maybe next week — writing up some thoughts about better, more easily understood language which we all can use and which people everywhere can easily understand, as well as some thoughts about what it means when financial planners provide value by providing financial planning services while simultaneously being compensated as money managers.

A good weekend to all, and may all the subways of NYC — heartbreakingly broken right now to those who love the people-made world as well as the natural — be up and running right soon.

1,106 words (about a twelve minute read sans links)

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