Why Independence Matters


Throughout the last year, the New York Times has published several explosive (and long overdue) reports on the terrible current state of the Teachers’ 403(b) market. This is a subject that is close to me, as both of my parents and my wife are educators. I actually began my career as a financial adviser working in this market with hopes of improving it.

Unfortunately, as the Times illustrates, there’s a long way to go. Ungoverned by any fiduciary standard or real government regulation, teachers’ retirement plans are often referred to as The Wild, Wild West.” These plans are notorious for having a plethora of bad investment choices, which are typically accompanied by exorbitant fees and lengthy surrender periods. That being said, there has always seemed to be one clear cut leader in the market, TIAA. It was actually TIAA’s mission and my firm’s affiliation with them that led me to work in the teachers’ retirement field in 2012.

That all seems to have changed. In the latest Times report, much of the TIAA mantra seems to have been discredited, at least when it comes to working with them directly. Here’s one of many cringeworthy quotes from the report…

It told advisers to avoid accidentally implying that you may be acting as a fiduciary,” when having educational conversations with clients. They should avoid referencing the participant’s best interest” and discussions regarding TIAA’s not-for-profit heritage.”

It should be noted that these allegations refer directly to TIAA’s internal Wealth Management division and are not reflective (for the most part) of their investment lineup. This distinction is important because there are a lot of do-it-yourself investors and independent financial planners who rely on TIAA’s investments, which are arguably still the best available in many education and non-profit workplaces.

This raises an important point that I believe is being drastically overlooked by the discussion around the new Fiduciary Rule --- Being independent is vital to providing objective financial planning and investment advice.

If a financial planner is tethered to a limited product list or an unequal compensation arrangement, how can their advice be in the best interest of the client all the time?

Imagine you’re looking for a new pair of running shoes. You’d want to be certain that you find the best shoes available for your feet and running style. You’d also hope to find them at the best price possible. It probably wouldn’t be the best choice to go look at stores that only carry one brand. Going to an independent store that carries several brands would increase your chances of finding the best running shoes for your particular feet. 

The same line of thinking applies to investment choices. If a financial adviser is affiliated with a mutual fund company, wire house broker, bank, or insurance company, there is a good chance that their investment recommendations are either limited or influenced by differing compensation arrangements. That’s not the case with (most) independent firms.

For decades, these big institutions have depended on their household name recognition to avoid actually serving their clients in the best possible way. They have put their interests ahead of the clients at every possible turn, and only now, after being exposed and mandated, are they even pretending to consider client outcomes as a measurement of their success. 

Fortunately for consumers, the playing field is now level. Independent firms have access to the same research, expertise, and technology that the big firms have. What they don’t have is corporate overlords creating top-down conflicts of interests, sales quotas, and proprietary products that benefit the firm at the expense of the client.

When it comes to choosing a financial planner, I’m admittedly biased. Plimsoll is structured as a fiercely independent, fee-only firm. There’s a variety of reasons why I believe that consumers should choose to work with an independent financial planner --- support local business, emphasize holistic financial planning, and address topics that big firms frequently don’t, such as student loans and cash flow management. However, the single most important reason is the unwavering emphasis on keeping the client’s best interest at the center of every decision.

Deciding to hire a financial planner is a big decision and one that shouldn’t be taken lightly. At its core, you are trusting someone to help you maximize your resources so that you can live your life on your own terms. That doesn’t seem like a job that’s earned by someone serving two agendas.

Tagged under Thoughts, a collection of observations on money and life.

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