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In this episode of The Long View, Pam Krueger, the founder and CEO of Wealthramp, elaborates on key factors to consider when selecting a financial advisor, various fee structures, and the significance of the fiduciary standard in the pursuit of financial guidance.
Below are some notable points from Krueger’s discussion with Christine Benz of Morningstar.
Why Fee-Only Models for Financial Advisors Are Superior to Commission-Based Products
Christine Benz: Please clarify what fee-only means for our listeners and distinguish it from other models, explaining why you favor the fee-only approach over commission-based products.
Pam Krueger: Fee-only refers to advisors whose earnings come solely from client fees. This means these advisors are dedicated exclusively to their clients, rather than being affiliated with a brokerage or insurance firm. This alignment can provide a clearer approach, even though it doesn’t guarantee high qualifications. It clearly differentiates between an advice model—where the advisor works solely for you—and a sales model, often associated with brokers who prioritize the interests of their firm over the client. I’ve always found the sales-driven advice model deficient, as it’s like going to a winery in search of craft beer. Genuine financial advice requires a fiduciary who adheres to the legal obligations set by the SEC or state regulations, emphasizing the significant distinction.
Understanding the Fiduciary Standard
Benz: Let’s explore the fiduciary standard. Many consumers perceive it as somewhat diluted, stating, “It feels ineffective.” Can you explain what it means to be a fiduciary and how one can verify an advisor’s fiduciary status?
Krueger: It’s straightforward. Anyone can check this. When an advisor registers as an investment advisor and their details are in the SEC or state database, they are governed by regulatory standards. They are, by definition, obligated to act in their clients’ best interests as fiduciaries. This differs significantly from those claiming to be fiduciaries without the legal accountability—those who may adhere to personal standards, ethical considerations, or day-to-day moods. The requirement for legal fiduciary status applies solely to registered investment advisors.
Suitability Standard Compared to Fiduciary Standard
Benz: Brokers operate under what’s known as the suitability standard. Can you explain how this contrasts with the fiduciary standard applicable to registered investment advisors?
Krueger: At 24, I worked for a brokerage firm and later managed 60 brokers by 28. My primary focus was ensuring the distribution and recommendation of products that clients deemed suitable—essentially what fits them. This is markedly different from the fiduciary standard, which mandates advisors to act in their clients’ best financial interests, involving a much more thorough examination of their situations.
Navigating the ‘Wild West’ of Financial Advisors
Benz: You previously referred to the financial advisor landscape as a sort of “Wild West,” filled with individuals of varying expertise. Can you discuss the legitimate categories of financial advisors and their roles?
Krueger: Just a heads-up, you’re soliciting my opinion here.
Benz: That’s insightful!
Krueger: Back at 28, I faced a pivotal career decision: to pursue a path in sales, advising clients on product recommendations, or shift towards wealth management, encompassing deep financial planning including tax strategies. I chose to become a registered investment advisor, embracing that fiduciary path. Individuals can begin at that same juncture—90% of financial advisors reside on the sales side, typically linked to brokerage firms or insurance entities. This leaves approximately 60,000 on the fiduciary side, considerably narrowing down the options.
