A Letter from Our President
At Creative Planning, we believe the advisor should always unquestionably be on the side of the client. At the core of our belief system is the idea that investors should always know exactly what they are getting when they pay a fee for investment advice.
For us, this means:
- The client should clearly know the fee they are paying the advisor for advice.
- The advisor should always act as a fiduciary when giving the client investment advice.
- The advisor should never get paid any other way for the investment advice.
At Creative Planning, our clients know exactly how we are paid for our investment advice, we serve as a fiduciary on their investments in all cases, and we never receive other compensation from third parties for investment advice.
Unfortunately, this is the exception in the financial advice industry. Most financial advisors are brokers who have no fiduciary duty. This means they don’t legally have to act in the client’s best interest, instead being held to a “suitability” standard. When was the last time you wanted anything that was “suitable” for you rather than what was “best” for you?
Other advisors are “dually registered”. This means they are fiduciaries sometimes and brokers other times. It also means they can legally be compensated in different ways for investment advice. In our opinion, such advisors are the ultimate wolves in sheep’s clothing. The client likely thinks their advisor is a fiduciary all the time, when that simply is not the case. Why would an investor want to work with an advisor who acts in their best interests some of the time?
Yet other advisors are fiduciaries, but have created their own products that they then in turn include in their clients’ portfolios. This is commonplace in our industry. Almost always, the funds don’t bear the name of the parent company, so it is not shocking that unsuspecting clients are often surprised when they find they paid a financial advisory fee to be told to own some of the same company’s mutual funds (and then pay another fee!). What are the odds these funds are truly the best in their class? What are the odds the financial advisor will recommend dropping the funds if they don’t perform well?
Finally, some advisors charge a fee to manage a portfolio then recommend a managed portfolio that pays the advisor yet another fee! Wait a second. Didn’t the client just pay a fee to have their money managed? Why is the client paying a fee to have the advisor hire itself to manage the portfolio? Along the same lines, some fiduciaries have mutual fund families pay them “consulting fees” or “shareholder services fees” for placing their clients’ money into their mutual funds.
The financial services industry is debating the above conflicts, as well it should. Another issue around conflicts has to do with insurance. At Creative Planning, we are not dually registered and are not investment brokers, so we cannot sell or collect a commission on the insurance products that are largely associated with conflicts, such as variable annuities and variable life insurance. Nonetheless, we do offer insurance services to our private and business clients. 95% to 99% of the products that we recommend to our private clients (individuals), on an as-needed basis, are term life insurance and disability insurance. At Creative, we do not believe it is enough to advise a client. We believe in helping them execute on the recommendation. In other words, we like to take action to get things done for our clients.
Early in my career, a husband and wife met with myself and Molly Rothove, one of Creative’s first employees. We had put together a financial plan and recommended they obtain a term life insurance policy to make up for a shortfall. They decided not to get the policy. Less than two years later, the husband, a physician, died of cancer, leaving his family in financial turmoil. What ensued for the family bordered on Greek-tragedy proportions. I still work with his wife and daughter to this day, but unfortunately the road to financial independence was much more painful than it needed to be. Since then, I find myself pushing clients much harder when a need really exists, and I am proud of the team I have in place to get it done.
Having said that, I do realize that many in the industry perceive even term life, disability, long term care and other insurance products as posing a conflict between the advisor and the client. The argument is that the financial advisor will earn a commission so he has an incentive to recommend the policy, even if it is unnecessary. I recognize that and have never compensated any of our financial advisors for recommending a policy.
Creative Planning has received numerous awards over the years, but the two I am proudest of are for being named one of the most charitable organizations and for being one of the best places to work. I digress? Not really. One of the reasons I am so proud of our team is that as a firm, we have always given of our time, expertise, and money. And that leads me to this….
Effective April 1, 2016, Creative Planning will be giving 100% of the profits derived from its private client insurance practice, which includes all term and permanent life insurance, disability insurance and long term care insurance, to charity. This will be independently audited every year. If the past is indicative, this means we will be pushing hundreds of thousands of dollars more into the community going forward.
This is a marriage of our ideals. When it comes to investments, we only get paid one way, we are always a fiduciary and never a broker, and we will never create and market our own funds. When it comes to insurance, we believe some of our clients need it (though never the “investment” kind like variable life) and we will continue to offer it to help our clients protect their families, incomes and quality of life. We acknowledge the perception and reality of conflict and feel so strongly about removing it that 100% of the profits going forward will go to charities. Specifically, we aim to primarily help those that are the opposite of our clientele: those most in need seeking food, shelter, education, escape from abuse or a second or even third chance. We are excited about the additional impact we will have on our community.
Peter Mallouk, JD, MBA, CFP®
President – Creative Planning, Inc.