December 3, 2018


Yeah, I had to do the same thing the first time that I saw this phrase…and I’m an (I guess by definition) “Millennial” (i.e. we’re supposed to know every abbreviation ever seen on Twitter).

TANSTAAFL stands for “There Ain’t No Such Thing As A Free Lunch.” We’ve all heard it before. We’ve all probably been in situations where, after the fact, we’ve experienced it before. We all know that it’s something we should be aware of when making decisions.

In the opacity and confusion of personal finance and financial services business models that exist out there, there seems to be a “race to the bottom” as it pertains to fees and expenses.

Let me be absolutely clear about three (related) ideas: professionals should get paid for the service they provide, the perceived value of services provided should significantly outweigh the cost of those services, and all fees and costs should be adequately disclosed in an easy-to-understand, transparent manner.

The good news is that the industry of personal finance, I believe, is slowly but surely transitioning into a profession. Why do I make the delineation between the two? Because I and other planners agree that there is a difference between an industry and a profession.

The bad news is that it isn’t happening fast enough.

Caught in the middle of this shift are unsuspecting investors that *think* they are being served with their best interest in mind and with the same mindset and ethical guidelines that influence the professions of law, accounting, optometrymedicine, dentistry, and others.

I talk about this at length in the second episode of The Dose Podcast where I use the example of renting a tux for my sister’s wedding and the difference between whether the person helping me rent my tux was acting “as a fiduciary” with my best interest in mind or based on the “suitability standard.

So what are some of the steps you can take to ensure that you are being served fairly, ethically, and transparently? Here are some suggestions:

Ask your advisor their fee for service. If the advisor says “there is no fee for XYZ services,” they are lying by omission because, unless the advisor and you have an up-front agreement to do the plan pro-bono, the advisor must sell you some type of investment or insurance product and get paid a commission or fee. This is an inherent conflict of interest.

Let me be clear about one thing: selling products (investment or otherwise) does not automatically make the broker/representative in the wrong nor does it mean that the investment isn’t good. It simply means that every investor must enter into that transaction with this thought: “Is this being recommended to me because it’s good for me or because my broker (advisor) makes a big commission?” This conflict of interest can be amplified if costs are not disclosed.

Work with a CFP® Professional. A CFP (Certified Financial PlannerTM) is bound by an additional level of ethical and professional guidelines (called the CFP Board Code of Ethics and Standards of Conduct) that s/he must abide by in order to stay in good standing with the CFP Board. If the professional is caught violating any of these rules, disciplinary action can and will be taken by the CFP Board.

Work with a fee-only planner. This recommendation ruffles some feathers in my professional circles, mainly for the reasons listed in the second paragraph above when I talk about asking how your advisor is paid. A fee-only planner is only paid by you the client–no commissions or outside revenue. This is usually paid in the form of financial planning fees and/or investment management fees (typically a percentage of assets under management).

The benefit of this model is that the advisor is not incentivized to sell you financial products. They are paid only to dispense advice and/or manage your portfolio. Granted, some of their compensation may come from assets that they manage for you, but it’s a set fee schedule that is (a) transparent and upfront as part of your agreement with them, (b) applies to all accounts you place in their care, and (c) isn’t varied from one product to the next. For example, if the advisor uses ETFs (Exchange Traded Funds) in your portfolio and decides to change from XYZ fund family to ABC fund family in your investment account, there’s no additional fee paid to the advisor for making this switch. There’s no commission or sales charge as part of that switch…it’s all part of the management of your account.

Again, being paid a commission is not a bad thing and does not mean that the advisor is automatically doing harm to the client. For example, getting some good, level term life insurance is a great solution that every single client with a family should consider. If you implement that policy with an advisor that also happens to be a licensed insurance agent, they will earn a commission on the placement of that policy. No big deal, because it was a policy that (a) you needed and (b) served your needs.

But when that same advisor is licensed as an insurance agent, they also have the ability to sell you different types of life insurance that may not be in your best interest, including whole life policies that rarely live up to their promises and just end up being a really expensive way to purchase life insurance.

Will this person act with your best interest in mind or will they first look at the opportunity to sell you a really high-cost life insurance policy that will earn them a nice commission? This is where the phrase “buyer beware” comes into play.

The best combination I can think of in this scenario is to work with your fee-only/fiduciary advisor to determine what type and how much life insurance you need and then utilize an insurance agent to help with that implementation.

The idea of paying for professional financial advice is somewhat of a new business model that is slowly but surely becoming more popular. It may seem a bit out of the ordinary to pay for a financial planner/coach/advisor. However, I believe that getting advice that is in your best interest from a professional, ethical, knowledgeable, and caring advisor isn’t expensive–it’s priceless, with life-long implications for you and your family. If you’re not paying a fee directly to your advisor, just know that you’re paying for it in some way, shape, or form, because, well…TANSTAAFL.

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