In this episode of YAFPNW, I chatted with Dan Yerger, MBA, CFP®, AIF®, CDFA®, about his extensive work in the financial planning profession and why he’s removing transactions from his fee model.

Dan’s background

Dan didn’t start out in the financial planning world — in fact, he started in the U.S. Army. After retiring from the Army, Dan received his MBA with a certification in finance. From there, he worked at IBM while attending grad school, and became interested in financial planning when he had to do a financial plan for his parents. Despite working as civil servants for over 25 years and qualifying for a “good” pension, Dan quickly realized his parents’ retirement plan didn’t account for increases in the cost of living, and that their retirement was at stake because of it. After that, he knew he wanted to help people with their financial planning needs.

Fast forward a few years, and Dan now operates his own financial planning practice in Longmont, CO, and officially received his CFP® in 2018. While he evaluated the bank and insurance side of financial planning, Dan felt called to start an independent practice, and founded one affiliated with Waddell Reed in 2015.

Since then, he has served a uniquely wide range of clients — and even a number of pro bono clients.

The financial planning process & determining pro bono needs

As most new planners do, Dan struggled to find his own preferred compensation model within his practice. While he initially held a traditional fee-based model with transaction rates, he has decided in 2019 to move away from this model. Instead, he now offers a fee-based, financial planning and investment management service. He determines fees on a case-by-case basis and offers a free initial consult, which he uses to determine the client’s needs and complexity. 

As he says in the episode, he figures out his fees based on how much time it will take to successfully provide and implement a plan, and applies that to the compensation his firm would like to receive. “The biggest thing I look at is really the complexity,” Dan shares. Clients with $1 million in a single account, for example, are different than someone with three rental properties, a business, and accounts scattered all over. That increases the time, and therefore cost.

Once he has the information he needs to calculate out his rates, Dan provides the numbers to the client and they can determine at that time if the compensation is within their budget. As a result of his fee-based changes, Dan has only accepted clients on a financial planning and investment management basis.

On top of his fee-based services, Dan also offers pro bono support to clients who need help finding resources, or who are just getting back on their feet after a major financial setback. Following the FPA’s model for pro bono work, he (in some cases) offers a financial planning services agreement fully discounted. His reasoning? If these clients are brave enough to ask for help, the least he can do is offer them support.

But more about this compensation model…

Shifting to fee-based model

While Dan shares his process for removing transactional fees from his model, he also shares how he came to his decision in this episode of YAFPNW. During our chat, he talks about the difference between “architects” and “carpenters” and which role he wants to fulfill inside his own practice. As Dan shared, it’s possible for him to design a financial plan and walk a client through it (architect), then work with somebody much more specialized in those areas (carpenters) to handle the actual execution.

And while he knows that every planner is entitled to his or her own experience, he finds that charging a transaction fee for investments puts a restraint on what he can do for his clients. Planners using this model may have to assess the cost-benefit tradeoff for their client, instead of just doing what is best for their overall financial plan. For him, removing transaction fees allows him to work in the best interests of his clients. It goes beyond documenting or disclosing any conflicts of interests, Dan says, and extends into how we act each day in our clients’ actual best interests. For this reason, he feels satisfied with his transition to a fee-based model but welcomes discussion with planners with alternate methods.

At the end of the day, his new fee model also allows Dan to work with a team of experts, take a lot of the execution of insurance plans, product underwriting, etc. off his plate, and better serve his clients by providing the best financial plan he can. “I don’t have to be the architect and the carpenter for what I’m building,” Dan shared — and I think that’s something many new planners are struggling with and can relate to.

So, if you want to hear more about Dan’s journey through the profession, what called him to change his fee model, and why he thinks education and continuing education are critical to serving clients better, make sure to listen to our chat!

 

 

 

 

What You’ll Learn:

  • Dan’s background in the Army, IBM, and grad school
  • Why Dan is so passionate about pro bono work
  • Adopting a consultation and compensation model that works for your clients
  • How to calculate time and complexity into a client’s quote
  • The ratio of CFP® professionals to people in need of financial planning
  • How to successfully change your fee model
  • Why transaction fees may not serve you or your clients
  • Why ongoing education and a learner’s mind are critical in this profession
  • The difference between the “architect” and the “carpenter” (and which one you are)
  • The need for discussion of best interests and conflicts among professionals

 

Show Notes:

In this episode of YAFPNW, Dan Yerger, MBA, CFP®, AIF®, CDFA® mentions:

You can keep in touch with Dan by connecting with him on LinkedIn.

 

Show Transcript

Episode Transcript


Matt: Thank you so much for joining us today, Dan. I’m really excited to have you here today to chat about advisor compensation and hear a little bit more about your story.

Dan: Hey, I’m really excited to be here, Matt. I didn’t think I’d be here when I met you back in New Orleans.

Matt: Funny how things… They come full circle not too long down the road.

Dan: True enough.

Matt: All right, great. Before we dive into advisor compensation, how did you come into financial planning, and where are you currently working today?

Dan: I came into financial planning out of grad school. I went and gotten MBA with a certification in finance at the time that I was getting out of the army. I spent a little bit of time working at IBM while I was in grad school, and really came into financial planning as a result of two things. One, I got to do a financial plan as part of grad school for my parents, and figure it out pretty quickly that even though they’d done all the right stuff, they weren’t going to make it in retirement. Pass that, when I started looking at really getting into financial world, there’s the institutional side.

Dan: There’s the personal side. There’s banks and insurance. I kept coming back to really wanting to make sure I was doing something in financial planning. That brought me around to starting a independent practice affiliated with Waddell and Reed, which is a dual registered firm out of Kansas city. I’ve been practicing affiliated with them for the last four years.

Matt: Wow, that’s really interesting. What exactly did that financial plan for your parents look like? What was that process? I just think that’s a fascinating way to gain that exposure.

Dan: Sure. When I took that class, I knew nothing about the financial planning profession, but that was being taught by a CFP as, I think, a part time piece for him. He was really just forcing us to go through the financial planning process one step at a time. The textbook for the course was the CFP Education Guide from, I think, 2014 by Kaplan. We were really learning the whole CFP curriculum through this course. In the process, of course, you had that assignment to do a financial plan.

Dan: When I did the one for my folks, they both worked in law enforcement for over 25 years each, and so they were on a fixed pension system. As I think we’ve seen nationally, pensions have some trouble with cost of living adjustments as time goes on. That was eye opening for me. Doing a financial plan out of scratch using excel worksheets and word documents isn’t the cutting edge of the profession, but it was really shocking for me to see two hardworking folks that I thought were some of the smartest people in the world that were going to get blindsided by something as simple as cost of living.

Matt: Would you say then that that exposure to that scenario really is what drove you to push towards the career in financial planning versus some of the other financial services that are out there?

Dan: It was absolutely critical. I don’t know for anybody else out there, but when I went and talked to banks, they’ve got a career track that set on calendar. You’re going to be a junior loan officer for three to five years, and then a senior loan officer for three to five years, and then a branch manager for three to five years, so on and so forth. If you’re working with an insurance company, they have insurance products and of course they’re the best insurance products. Why would you ever use anything else?

Dan: Of course, we know that every carrier has got some good things and some bad things going on in that space. You look at institutional side. As exciting as getting up at four in the morning to check out how securities in Singapore are doing every day of the week for 10 years before you might go from analyst to portfolio manager is. I really wanted to get back to helping individuals. I think that was the biggest thing that I missed in my time working with IBM.

Dan: Being in the military, you’re helping people, but you’re helping these massive organizations or these greater causes. It’s hard to see the direct impact you’re making on individuals.

Matt: Absolutely. I know that was the biggest shock for me coming into the profession. I started out at a broker dealer and eventually shifted out of that just because I was just there pushing product. I didn’t enjoy that so much. What type of clients are you currently working with? I guess, you’re running your own book of business at Waddell. Who are you working with each and every day as your clients?

Dan: It’s interesting. When I got into being a financial planner, I think like a lot of financial planners, I worked with anybody who could fog a mirror. The thing that attracted me to Waddell in the first place was that they really focused everything on being a financial plan first followed by implementation or solutions. My first couple of years, I was working with people that I worked with at IBM. I was working with friends and family. That wasn’t because they sent me out there to to go solicit to them, but because that’s who I knew.

Dan: I, pretty quickly after starting my practice, joined the Longmont Chamber of Commerce, the Boulder Chamber of Commerce, which are the chambers in the area I live in here in Colorado. I just got married to those communities. There’s now a running joke that I live in the basement of the Longmont Chamber. I was awarded ambassador of the year last year by that organization. What happened over time is that though I really didn’t target business owners or self-employed people directly, what I found is that I’ve ended up working with people that I would describe as being in a position of trust.

Dan: That is people who run their own business, who are trying to make their business work for themselves. That’s business owners trying to figure out what’s best for their employees or for their team. Over time, what I’ve also grown into quite a bit is working with attorneys and trustees on state issues, divorce issues, that sort of thing. A lot of that, I think, comes back to just really, really aggressively trying to make a differentiation point around what is the quality of what you’re doing with your finances, and particularly not just yours but with other people’s if you’re responsible for them.

Matt: At this point in your career, have you really set that as a barrier to planning with you, business owner, attorney, or are you still working with clients of all walks of life?

Dan: I work with clients of all walks of life. I actually feel pretty ethically compelled to keep doing that even if I one day find that I really do have a really thick book of trustees or stewards or business owners, that sort of thing. When I was going through the process of getting licensed and evaluating the career track of being a financial planner, I really look for other people’s input, because I personally had had one interaction with a financial advisor before I ever became a financial planner. The interaction I had was not great, but I wanted to know what other people thought.

Dan: The recurring thing that kept coming up over and over again was, “Yeah, I got a bonus at work. I went into the bank. I asked them who I could talk to. They pointed me to some guy in an office. He asked me how much I had. I said I had just gotten $3,000, and he said, ‘Sorry, we only work with a quarter million or above, or we only work with people $10,000 and above.'” For me, ethically, if somebody asks for my help, as difficult as it is for people to admit they have money challenges today, I’m going to at least help them.

Dan: What that usually results in is either they’re a good fit. I can work with them, or they are not a good fit because of one or two reasons. Either their issue is so simple that they really don’t need a financial planner. It’s something they maybe could have Googled or figured out, but they decided to ask for help. That just becomes a pro bono case where I’m just going to answer their questions, point them in the right direction, get them going in life.

Dan: You occasionally run into those people who are really hoping you’re going to help them invest in the next big cryptocurrency or something like that. For those folks, as I’m sure we’ve all had that conversation, the risk parameters just don’t make any sense, so we’re just not a good fit. If somebody is brave enough to ask me for help with financial planning, I’m going to work with them, or I’m at least going to point them in the right direction.

Matt: Wow. I think that’s a really great approach just to the whole conversation. I know that’s the biggest problem that most advisors have is we might be talking to people who quite aren’t ready to take that leap of faith and ask for help. When you’re working with such a wide set of people, how exactly are you charging them? Even when it does turn into a pro bono, are you charging them in advance of that, before that? How are you, I guess, going through the prospecting journey to get your clients into eventually say, “Hey, it’s time to pay me?”

Dan: I follow a process that I think most planners follow, which is, “Hey, the initial conversation is free. That consult is free.” If somebody comes in and during the process of that initial financial plan conversation, it’s pretty obvious that they are going going to need pro bono support. Maybe they are just recovering from bankruptcy. Maybe they’re in such a low income occupation that they can’t begin to afford it, or they come to you with a debt problem. Then often, the results of that consultation is that I’m getting them in touch with the resources that they need.

Dan: If their issue is right there on the fence, then we’ll follow the FPA’s model for doing pro bono work. We’ll go ahead and do a financial planning services agreement. We’ll discount it down to zero. We’ll help them go on for their… For those folks who are kind of more normal, or I don’t want to alienate by saying normal, but for those folks who are a normal client fit, for those folks, we typically charge a financial planning fee in advance. It’s usually calculated from a combination of factors including income, assets, number of accounts.

Dan: We try to boil that down really to how much time is this going to take? Then just spread that across a calculation of that time versus the compensation we’d like to receive for that time. We’ll provide that in advance to a client at the end of the data gathering process. At that point we have the data, we need to make that estimate, provide that information to the client. They can choose to accept it or not accept it at that time. If they accept it, then we’re retained in advance. We build out the plan.

Dan: We go through multiple meetings of strategy conversations and rebuilding the goals and perspectives. Then help them implement that plan. On the back end of that, obviously, we offer investment management as a service. We offer other things like insurance brokerage or commissionable investment brokerage, although in my own practice, I’ve made the decision earlier this year that I was going to step back from doing transactional work like that. On a going forward basis and for the last couple of months, I’ve only accepted clients on a financial planning basis and on a fee basis, investment management basis.

Matt: Very interesting. I really would like to key in on one of the first things you said there. Charging what we think it’s going to cost us in time. That’s what you said, right?

Dan: Yep.

Matt: How exactly are you coming up with that calculation? I know. I’ve seen it in the forums. I’ve heard it at conferences. We’re always so conscious as advisors about asking for a fee. We obviously want to be fair to the clients, but how do you make sure it’s fair for you, the business owner in this case?

Dan: Sure. The biggest thing I look at is really the complexity. I’ve got a pretty good calculation in my mind about how much time something is going to take. If somebody puts a $1 million in front of me, it’s all in one account. They’re already retired. They’re living on social security. That’s not a complicated financial plan. They might have complicated financial needs, but there’s not a lot of variables that go into that. There’s not a lot of financial data entry into financial planning software. There’s only so many scenarios you can build out.

Dan: What’s fair there is to just reflect the amount of time that that’s going to take. On the other side if somebody comes in with three rental properties of business, both a independent contractor relationship and a full corporation, they’ve got investment account scattered all over the place, that’s going to take even more time, even though they might be at a lower net worth in a scenario like that. We’re going to take all of that and really just calculate it out to what I found to be a pretty accurate representation of the time it will take to complete the plan or at least complete all the drafts of the plan, the implementation.

Dan: Multiply that out by just a basic hourly amount. Then that’s what gets presented to the client as their fee. I’m very clear about, “This was my estimate. If I’m wrong, that’s not your fault. I’m not going to come back to you and ask you for more money on the back end.” Again, they get to accept that upfront, know what the cost is upfront. Past that, if they want to keep it retained or keep it going over the long term, then on a biannual basis, they can always could have resubscribed to that.

Matt: I guess, again, just to dig a little further into that, how did you come up with the calculation? How did you know as a business owner, “This is what I need to make to make it worth my time?” Were you’re looking at, “This much goes to overhead. This much is my target profit margin?” How did you come to that number?

Dan: I actually didn’t do it from a cost standpoint. Part of the reason for that is my practice. I’m a solo practice for everybody else’s context. My practice is at a stage where I don’t need new revenue to meet my lifestyle goals or needs. I’d like to grow my practice. I’d like to bring more people in, but I don’t price plans on a operating cost basis. I price it on what I think the value of the time is worth.

Dan: I took resources like the Kitces report from last year regarding what the cost of plans are, looked at what my time is worth with all the work I’m already currently doing, and use that to engineer what I felt was the appropriate increment. Typically, clients depending on their complexity ended up in a range somewhere between 1500 and $3,000 on a plan. I’ve had plans scope as low as $300. I have had plans go up to $3,600, but it all comes back to that complexity question.

Dan: I don’t engineer it out of, well, the cost of lights is this much and dividing the time for a subscription to eMoney, and all this comes out to this much. I really look at it just as a time value question.

Matt: Absolutely. I didn’t mean for it to sound like that ticky tacky. You’re not calculating the kilowatt hours they’re using when they’re in their office. I guess, as you’ve mentioned there, as something you would like to scale the practice, is that going to impact what that fee range is? Are you going to reevaluate that? How are you really going to approach that topic, because with more people obviously comes more overhead? Yes, you can create more plans, but are you going to reevaluate that at all?

Dan: No, not directly or not immediately. A big driver for that is if I bring someone on, that’s a cost I’m taking on. That’s not something I’m going to pass on to my clients. My business needs to support that person out of the gate. I don’t need that person to earn their keep or pay their way by the fees they could possibly generate or that sort of thing. The way I really look at that is that my practice has to hit a bandwidth challenge as I think all practices reach if they grow sufficiently for me to then go ahead and feel that it’s an appropriate investment to bring that person in.

Dan: Even then, that person’s probably a multiyear investment in terms of getting them through their CFP certification, getting them through other designation pieces. I don’t view bringing someone on as in the way that a lot of people do. I don’t see them as the person to start pushing the bottom half of the book on to. I look at that person and say, “Great, we’re in a community of almost 100,000 people. I can only really effectively help 100, 125 something like that.”

Dan: Who are the 100, 125 people you can help in this community, because here at least in Longmont, Colorado, we’ve got 150 registered reps. We’ve got about 15 CFPs. We’ve got only three CFPs offering financial planning and in a way that I would recognize as financial planning. When we break that math down, there’s one Dan Yerger, CFP or other CFP for every right now about 31,000 people. I look at that more as a needle to help the community than necessarily to improve the margins on my business.

Matt: You really seem community driven. I think that’s very interesting compared to other people out there. This is not to bash people who have a niche, but who solely focus on one target demographic. What was your drive to approach this as a service to your community versus strictly a business?

Dan: I didn’t grow up with money. You heard my background earlier with my family. There’s absolutely a survival curve that has to be accounted for when you’re thinking about it as a business. I don’t want to tell any planner on day one, “You’ve got to be thinking outside of yourself. You’ve got to be focusing on others.” I’m part of that lucky 13, 14% that make it past their first three or four years in practice. I’m on a trajectory that tells me that dramatic economic upset. I’m pretty well safe at this point.

Dan: I look at it now as giving back. I think back to, again, the people that I had kind of talked to and interviewed who were told no or told they didn’t have enough money back in the day. Again, I just look at the difficulty of people asking for help about something like money in the first place. I can’t begin to say no to those folks. I think at the end of the day, we are the community that we live in. That’s not to say that people working in a niche or specializing are doing a disservice to their community. They’re just doing a service to a very specific community.

Dan: They may have something really special to offer in that context, but when I’ve come back to the number of CFPs doing financial planning in my community, there’s one of me for every 31,000 people. I can’t begin to help enough people. From that standpoint, I feel ethically obligated to try to help as many people as I possibly can because you know and I know and the people listening know that financial planning has the ability to make massive changes in people’s lives and really change the direction of people’s lives.

Dan: For me personally, that’s not something that I can hold behind a red rope saying, “You must have $1 million to enter or something like that.”

Matt: I think that just part of running a successful practice is you have that allowance, I guess, just to give up some of that time because you are meeting the requirements for your lifestyle.

Dan: That’s huge, right? Again, when you’re trying to make your practice succeed, if I was talking to Dan Yerger in his first year of practice, he’d be looking at me like I was crazy when I said that I did pro bono cases or just helped pointed people in the right direction. That’s a luxury that’s afforded to me on this side of the line.

Matt: Absolutely. I love that, but I do want to shift gears here a little bit. I know when we were first talking about how you were charging your clients, you mentioned that on a going forward basis, you were going to do away with the transactional component of what you could offer clients. What was your reasoning behind that?

Dan: A couple of things come into that. To give you some idea of what my perspective has changed just in really the last nine months, going into this year, I built my entire business plan for 2019 on the predicate of I’m going to ramp up the business. I’m going to get to a revenue level. I’m going to take the leap, and I’m going to hire somebody in, get somebody out of a financial planning program at one of the local universities and get them spun up into a CFP track over the next couple of years.

Dan: That was my hardcore goal going in this year. I then went and attended the FPA retreat back in May out in La Jolla and NextGen gathering down there in New Orleans in June. The conversation being had amongst the financial planning community at that level and in those groups is just a totally different conversation than what you read in articles or what you get in your local community on financial planning. The biggest thing that I realized in the context of that was even though I had been fairly successful from a revenue standpoint in implementing solutions, term life, disability insurance, that sort of stuff in my practice, the two biggest things that stuck out for me was that, number one, I don’t have to be both the architect and the carpenter of the plans that I’m building.

Dan: I can do the design, and I can walk a client through it. I can get somebody much more specialized in those areas to handle those parts. The second plane, truth being, I don’t actually like filling out insurance applications or chasing down medical records or any of the other things that go with that. To the investment side and the planning side and all of that, it’s hard for me to justify personally, and this is just my perspective. Somebody is welcome to come out there and correct me on this, but I just find it really hard to justify transactional costs in someone’s portfolio.

Dan: I think it puts such a restraint on what you can do for people when you’re looking at, “Hey, moving these assets is going to cost this much, or changing this thing out is going to cost this much.” It’s this constant kind of digging question at the back of your mind about, “Is this cost benefit trade off appropriate for this person in this situation?” From the going forward standpoint, what I really want to focus for myself and what I really want to focus my future team on is, “Let’s be the best financial planners we can be.”

Dan: “So let’s not only be certified financial planners, but let’s have the designations of the credentials that really allow us to specialize in the part of the community that we can help best, whether that’s being an accredited investment fiduciary, a certified divorce financial analyst, even a chartered life underwriter or something back in the insurance world, but let’s be the best planners we possibly can be. And let’s leave some of the implementation stuff to others.” There’s a great little interview.

Dan: I actually think it was Alan Moore interviewing Michael Kitces or Michael Kitces interviewing Alan Moore. It was one of them back on the XY Planning podcast years ago, but they made the point, “You don’t implement the mortgage for your clients. You don’t file the tax assurance for your clients. You don’t write the will and trust for your clients. You don’t put in place the reverse mortgage for your clients. You don’t do all this stuff,” but just because of our history and financial planning, we feel married to implementing these stuff.

Dan: I felt when I started my practice that having all the tools in my tool belt was a value add. What I found over time is that I don’t like using those tools directly or personally. I really would prefer to be sticking to the pencil or the pen in this particular analogy.

Matt: I really liked that analogy of the architect and the carpenter. I’ll tell you what, from my broker dealer days, I do not miss underwriting. That is the exhausting process at times. I do really like what you said there, and I think that has a bearing on the compensation, right? A good architect should be paid a good architect’s pay rate. Same with the carpenter. I guess when you were getting into that, what is it about the carpenter’s side of the business you didn’t like other than that constant conflict of interest essentially in the back of your head?

Dan: Well, and the conflict of interest is actually kind of an interesting part to me because we as as a profession tend to look at it and say, “We’re being fiduciaries. We’re doing the best thing as planners for our clients if we don’t consciously think about the compensation piece of it.” For example, even though, I think, one year in my practice made the million dollar club or table the million dollar, whatever it’s called, round table million dollars, that insurance organization, I qualified for it. I didn’t bother to join it or sign up for it because I didn’t even realize that I’d done that much insurance production that year.

Dan: Everything that I’d done had come as a result of just building out a financial plan and finding like, “Oh, this person needs half a million dollars in term coverage until their kids are out of the house.” That piece of things proved to just to be distracting. I think a lot of the frustrations I dealt with over the years had to do with the hospital not sending the records on time or the person forgetting to mention on their application that they had arthritis.

Dan: Even though insurance is a really important component of a financial plan, sometimes, you’re implementing what turns out based on the plan data to be the right solution for this person, and the compensation does show up. Sometimes, it’s a little shocking what the reimbursement can be for some of the strategies that you implement. I look at it ,and I look at the not the conflict of interest, but I look at the data here. For example, we look at something like the Kitces report from last year, and we see that our RIAs that have no insurance arm spend almost no time on insurance planning.

Dan: That’s probably a disservice to clients, but that tells us that the compensation does at least subconsciously drive us to pay more attention to that area or pay less attention to that area. On the other side of it, almost all the cases of somebody being in something bad for them or inappropriate for them over the years have had to do with insurance products or commission products or liquid investments or stuff with high compensation tied to it. For me, coming back to the architect and the carpenter part of it, I don’t view something like managing a passive index-based portfolio as carpentry.

Dan: That’s something that can almost be done I don’t want to say on autopilot, but to the expression that Carl Richards uses, “Investing done right is like watching grass grow.” Your focus throughout the year and over time really should be focusing more on, “Hey, are we doing the planning work? Are we keeping things up to date? Are we being tax efficient?” All that stuff. That’s all in the planning world. That’s not in the world of filling out 19-page 1035 paperwork from old annuities to lower cost annuities, or filling out 30-page health questionnaires for life policies.

Matt: You mentioned some of those conflicts. When you’re thinking about the compensation. I know you backed away from it a little bit, but is that driving you again towards that architect side? Have you seen things gone wrong? I mean, I understand the value of products. They need to be in a financial plan, but did that influence part of your decision as well?

Dan: Actually, not so much. When I talked about my practice being in a place where I don’t really need to focus on the revenue as much or what clients can compensate me with as much, part of what comes of that is that my practice just on investment fees, management fees and financial planning fees supports my entire practice on an ongoing basis. The insurance component of the practices becomes such a minute level, and the commission-based part has become such a minute level that I can cut that part of my practice off entirely, and I don’t see any noticeable difference in compensation.

Dan: Now, could that change if I wrote some giant million dollar variable universal life policy? Sure, but that’s going out to the extremes. For me, I care much less about the compensation and the conflicts thereof and more about doing the part that I am good at and focusing on that particular area. The other piece is as I’ve gotten more educated in financial planning, I’m a certified financial planner, AIF, a CDFA, STHFC. I have my MBA in finance.

Dan: The more education I’ve got, the more I realized that even though I don’t personally want to be a niche practitioner, I don’t want to say that I only work with cardiologists that work for a particular hospital network or something like that. I don’t want to trick myself into thinking I know everything and potentially doing a disservice because I don’t have the time or the bandwidth to do the full scale or due diligence necessary to pick the best insurance product for somebody or to find the best commission-based UIT or whatever the case might be.

Matt: I think that’s just something that’s really developed over the past few years. Again, I was the same way when I left the broker dealer. I saw a lot of bad things. That’s just how I viewed it. Here you are someone who has access to those products, access to that type of compensation, and you’re not in it. It’s not really fair to label someone based on what environment they’re working at, correct?

Dan: Well, and I think that’s certainly true. To that same extent right there, there’s always going to be bad eggs. At the same time, it’s very concerning when you have stuff like that worst of both worlds study that came out of Northeastern University a couple of weeks ago comparing the 75 largest broker dealer, dual registered hybrid firms in the largest 75 RIA only firms. The average fee or penalty paid by the largest 75 firms every year is $6.6 Million a year. Of all the 75 largest RIAs, the only fine or penalty that’s been paid at all was by one firm, and it’s $20,000.

Dan: I mean, that stuff is there in the macro economic scale, where I think if you’re being honest with yourself, you have to really evaluate. Just because I don’t consciously decide to do something that’s not in the best interest of my client, it’s because I don’t consciously say that I want the commission. Just because I don’t consciously say that I’m going to put my own interests first doesn’t mean that there aren’t things outside of your control that are potentially influencing or affecting. That’s why it’s called a conflict of interest, not a deliberately evil choice.

Dan: To that extent, one of the great concerns I have is that for all the great good of the CFP education of the new code of ethics and practice standards, which I love, I really do. The one thing that I think is probably lacking in a lot of education is how do we as financial planners act in the best interest of our clients? Not how do we disclose it, not how do we document it, not how do we make sure we’re checking all the boxes and filling in all the forms and handing over all the disclosures.

Dan: How do you know step by step day by day if the financial planning process that you are acting in the best interest of your client? I think that’s a huge question that we’re not asking. We’re not doing a good job of discussion.

Matt: I really liked just what you said there, plus the addition of not acting like you know everything. Do you think that in a sense some of the way continuing education has been structured has allowed this into that sense of complacency? Like, “Hey, we got our CEs, and that’s good enough.”

Dan: CE, I think, is the worst carrot humanly possible to motivate people to learn things. I think a financial planner who is genuinely a lifelong learner, who is genuinely a student of their craft doesn’t need CEs to go through their education. I got my CFP in 2018. That same year, I got my AIF. This year, I picked up the CDFA and the CHFC. Next year, I’m looking at the RICP and the AAP, and RLP for that matter. I’m doing that because I’m hungry to know that which I don’t know. I’m certain that by the time I finished that education, though I’ll know a little bit more, I’ll be positive that I don’t know enough to do some other stuff.

Dan: I think, CE is necessary. I don’t know that it’s current structure around, “Hey, here’s an hour-long seminar on the tax efficiency of ETFs is really the necessary thing for us right now,” but that’s my totally subjective opinion.

Matt: Going back to what you had said in the beginning about having good and bad experiences with things, you mentioned now that you’re not in this product side of the business. You’re not actively focused on that. What are you looking for in carriers to determine if their good or bad?

Dan: Well, the biggest trick here is you really need to look at, first of all, what is the planning problem we’re trying to solve? A lot of people try to play the apples to apples game with stuff like annuities or life insurance against investments. They’re not the same thing. They can have an investment component, but they’re absolutely not the same thing. I look at something like an annuity out there that might pay a guaranteed 6% step-up compounding not simple interest.

Dan: If the financial plan comes back and says that this person only needs a 4.9% rate of interest for their plan to succeed, there’s a pretty good case to be made for using that particular item to solve that particular problem, but it relies on the assumptions you made in your financial plan. If your inflation assumptions, that sort of thing were wrong, it might not be sufficient. I think the bigger problem we run into is the Maslow’s hammer problem. For a carpenter whose only tool’s a hammer, all problems look like nails.

Dan: When you’re looking at insurance carriers or products companies, I mean, I’ll give you my example. I don’t talk to wholesalers. I don’t want to talk to wholesalers. They’re very nice people. They know a lot about their products, but I tend to find that they all present everything in the shiniest way possible because that’s their job. I can understand that, but I think when you’re looking at a life insurance company, you should really be going back and taking a good hard look at what are the internal expenses?

Dan: What are the assumptions being used for this thing? What are the interest rates? What are the crediting systems? For some of those guaranteed issue, carriers or online companies, that sort of thing, I can think of one that I get blasted with on Facebook with for ads for. I went and ran comparison quotes for them and against another carrier. All their policies are more expensive, and the policies I’m looking at have a commission on them. I think you really need to do your due diligence and not just fall into the trap of, “Hey, who’s got the lowest cost product? That’s the right one.”

Dan: Who’s the easiest to underwrite with? That’s the right one. I think to the point of my stepping back from it, I really do respect the point where for you to have a comprehensive understanding of all the life products out there, all the annuity products out there, disability products, long-term care, that’s a full time job. I’ve used to fool myself into thinking that I really could just wrap my hands around it, but when it comes to all the tips and tricks and little ifs, ands, buts, and whats around these particular products, I mean there’s some serious due diligence you’ve got to do in that corner.

Dan: I think the thing that planners have to really do is step back, and, again ask themselves, “How do I know that I am evaluating everything I need to evaluate for this product to know that it is the best option for this particular circumstance, and how am I mitigating my own conflicts of interest?” Again, if I find that the plan shows that this person needs this rate of interest but it’s a product that I’m not able to offer because I’m fee only or because I only do fee based investment management or something like that, what is my system for checking myself when I reflexively go, “Ah, but that’s a lick. That’s not good, but we shouldn’t use that.”

Dan: I think people really need to really create their own rule set or use someone else’s rule set for evaluating their decision making process in their evaluation process for this sort of stuff.

Matt: That’s a fantastic point. Those products are changing all of the time. Again, let’s focus on being compensated as the architect not being compensated as the carpenter, and find a good carpenter who knows what the best building materials are for this particular situation.

Dan: I think that’s a place that we need to get to. I would love to see the industry as a whole adopt a levelized commission structure for the per unit of insurance costs or something like that. Hey, for every $1,000 of insurance, the commission is $1 or something like that. I’d love to see more fee-based or investment advisory-based annuity products out there. I would love to see just more stuff that takes the compensation question out of the formula or the difference in compensation out of the formula, and really brings it back to, “Am I evaluating this product or this option based on its individual merits, its writers, its benefits rather than its writers, its merits, its benefits, the cost of the premium to the client?”

Dan: At the end of the road here, what’s the payout? I think if we can carve some of those things out, they become much stronger tools for everyone.

Matt: We might see less of those shiny one trick ponies that solve every problem under the sun, right?

Dan: Yep. We can certainly hope so.

Matt: All right. Well, thank you so much for joining us today, Dan. I really enjoyed this compensation. There was a ton of great value in this. I hope to see you around at some of the future FPA conferences.

Dan: I’ll hope to see you at FPA National this year.

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