• Jake Morris

Horror Stories Of Financial Planning, Halloween Edition

The Fiduciary Standard, Reg BI, And Bad Financial Advice

When I think of a horror movie, I think of something lurking in the dark and then popping out to scare us — the classic “jump scare.” Rarely does someone think of having a meeting with a professional in a nice suit, in a nice office, on an expensive plot of Manhattan real estate as being a horror story. In honor of Halloween and bad financial advice, I hope this story isn’t too scary for anyone! Moreover, I hope this article helps illustrate why the fiduciary standard isn’t the same as the SEC’s Regulation Best Interest, or Reg BI.

When I first entered into the financial planning field, not only was I financially undereducated, but I also was dealing with the grief of losing a loved one. I’ll never forget taking an appointment with a senior advisor at a top financial institution. Among the items to sort through was an annuity that my mom had left to my brother and me. We had to select a payout schedule, soon, and were seeking professional advice. After looking through a financial statement for a few moments, the question of which payout to select was answered with, “Rip the Band-Aid off.”

That doesn’t sound so scary, right? Mothers tell their children that they have to rip the Band-Aid off all the time. It’s how we tell children that they need to be brave. The problem with “Rip the Band-Aid off” in this case is that it made the entire annuity taxable, in one year, and pushed us into a higher tax bracket, which from a tax standpoint was a horror show.

This story showcases the difference between the fiduciary standard and the less strenuous Reg BI. At the time this incident took place, broker-dealers were being held to a standard of suitability, meaning they need only make recommendations that were considered “suitable.” As consumers, we need to be aware that a suitable recommendation is not necessarily a recommendation free from conflicts of interest.

As a fee-only Certified Financial Planner™, I’m held to a fiduciary standard, meaning that I’m legally required to act in my client’s best interest. At all times. That’s the way it should be — in my opinion, all financial advice should be fiduciary.

Just a few years ago in 2017, the U.S. Department of Labor proposed that all financial professionals giving advice on retirement accounts be held to this fiduciary standard in what was known as Regulation FD. When the industry failed to adopt Regulation FD in 2019, the compromise was to update the previous suitability standard for broker-dealers to Regulation BI. While arguably an improvement over the previous standard of suitability from a consumer protection standpoint, as broker-dealers were now required to disclose conflicts of interest when giving advice, it still means that broker-dealers are held to a different standard than fee-only fiduciary financial planners are, and that consumers need to educate themselves as to the difference. Fiduciaries have a duty to be loyal to their clients. Broker-dealers’ loyalties are still to the companies that employ them.

I’m not the only one who feels strongly about this. My planning network, XY Planning Network, recently sued the SEC over Reg BI for these same reasons. As Michael Kitces said: “[W]hen Congress created the Investment Advisers Act of 1940, they created a clear and bright-line delineation between brokerage salespeople in the business of selling products, and investment advisers in the business of providing financial advice, and… the SEC’s Reg BI has inappropriately attempted to redefine this bright-line separation."

We as consumers believe that when we go to professionals in fancy offices, with nice suits, that their advice is competent and that these professionals have always had our best interests in mind. We trust that their advice won’t be detrimental to our own best interests. But broker-dealers are in the business of selling products, not in giving fiduciary advice. You can’t disguise product sales as advice. Fiduciary financial planners are in the business of giving advice, not selling products.

Here’s what the financial professional should have said to us regarding which payout we should select if he had been acting as a fiduciary:

“Because the payout rates are similar, the decision is a personal preference and should be based in part on your immediate need for money and based in part on your needs and goals over the next five to ten years. You should ask a tax professional to help you make this decision. If you take the lump sum now, all of the proceeds will be taxable as income this year, which could push you into a higher tax bracket and forfeit your opportunity to spread the taxable income out over many years. Even though the entire amount of the annuity will be taxable, regardless of which payout option you choose, you have the option to stretch the tax consequences out over many years, which could reduce your overall taxes paid.”

I guess “Rip the Band-Aid off” sounded more suitable to that person.

Even so, “Ripping the Band-Aid off” was not the right answer or in my brother and my best interests. It was a bad decision to take the entire annuity as a lump sum in our cases. Certainly, “Let’s spread the tax consequences out over a number of years,” would’ve sounded like good advice, but when the given analogy is a Band-Aid, no one wants to rip a Band-Aid off slowly, painstakingly, little by little over time. They want to rip it off and be done with it. Honestly, based on this professional’s reaction, it sounded like any option other than taking the lump sum would be acting like a baby. In this case, tearing the Band-Aid off over five to ten years would have saved my brother and me a lot of money in taxes.

People should never be bullied into making bad decisions. Even if the payout rates are the same, and the taxable implications are the same regardless of the payout schedule, the advice to take a lump sum distribution, to “Rip the Band-Aid off,” was terrible and was framed as such in order to intimidate and belittle us so we would be more susceptible to accepting more bad advice. It bears repeating: This was not in our best interests.

Frankly, this incident was instrumental in my early financial education and a real eye-opener. Sometimes, the thing you should be fearing the most isn’t lurking in the dark, waiting to jump out and scare you as eerie music builds around you, it’s lurking in broad daylight in a glass high-rise with a three-piece suit on.

As a fiduciary who is legally required to act in your best interest at all times, and who is only in the business of giving financial advice, I believe it is my duty to help inform people that there is a difference between the fiduciary standard and the standard of best interest for broker-dealers. When working with a broker-dealer, it’s still buyer bewwwwwwwware unfortunately.

So, horror stories aside of paying too much in taxes, the point is that this experience made a big impression on me. It’s part of why I set out to become a fiduciary, because I didn’t like how we were deceived and taken advantage of. As consumers, it is in our “best interest” to educate ourselves: Know the difference between a fiduciary and someone who says they are acting in your “best interest.” Know if the financial professional you are working with is held to a fiduciary standard, or if they are aren’t. Don’t assume someone is an expert because they work for a brand that you recognize or assume that they are trying to help you reach your goals just because they are taking a meeting with you. There is a difference between satisfying Reg BI and being a fiduciary.

Subsequently, after the aforementioned professional followed up on our meeting and sent us paperwork to begin transferring our remaining financial accounts, I got cold feet and decided I didn’t like where everything was going. Shortly thereafter, my brother and I received notice that the person who gave us this advice no longer worked for the institution — I wonder who else he told to “Rip the Band-Aid off”?

Happy Halloween everyone! Don’t get “tricked” if someone says they have your best interest at heart. It’s a “treat” to have a fiduciary on your side.


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