Quack, Quack! Discernment Needed!

I am a fan of humor, which is off-kilter, offbeat and unconventional. One of my favorite authors of this genre is Douglas Adams. In his book Dirk Gently’s Holistic Detective Agency, he provides the following reinterpretation of a familiar phrase: “If it looks like a duck, and quacks like a duck, we have at least to consider the possibility that we have a small aquatic bird of the family anatidae on our hands.”

In a previous posting I made mention of how critical it is for consumers to understand how financial planners are compensated. I stated that for the majority of the financial services industry “compensation falls into two broad categories: products and services provided and employment relationship. Both of these categories can have an impact on recommendations provided by the financial planner.”

Let’s return to our duck analogy. Literally, dozens of insurance companies and broker-dealers have made a conscious decision to offer “financial planning” services in order to promote the sales of their products and asset management services. This decision is beneficial for the firms in two ways: it generates sales through a loss leader (financial planning services) and provides some level of due diligence for the Financial Industry Regulatory Authority (FINRA).

These firms proclaim that the financial planning advice they offer is independent and objective. However, the recommendations that are made by their advisers and representatives are limited in scope – a fact which is not often disclosed. These firms may only make recommendations as to product and services which they themselves sell or offer.

This inability to recommend products or services which they themselves do not offer is a regulatory requirement. FINRA prohibits “selling away.” Selling Away is broadly interpreted by most firms as making a recommendation for a product or service for which they do not have a selling agreement or on which they have not performed due diligence. All of this is quite practical and protects the consumer.

So, if a financial adviser is paid commissions for the sale of products, or receives a fee for asset management, then that is the product or service for which they are providing. It is not financial planning. If a consumer is told they are receiving a free financial plan, but if it looks like an insurance sale; if the product is being sold to the consumer is by an insurance agent or broker; and if the adviser is being paid a commission then I submit to you the service being provided to the consumer is not financial planning, it is an insurance sale. Quack, quack! (Yup, this is a double entendre!)

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