Ironically, I received two guest posts in a row that put Northwestern Mutual on blast. For a while, I avoided writing their name on this site. However, I am experiencing more and more questions about this company in particular despite the bad press they receive in the physician finance blogging world. Yet, with alarming frequency, I have to deal with Northwestern Mutual questions both in my main job where I spend time educating doctors about personal finance and on this blog.
For the record, I did not request either guest post. They were freely offered by experts in their respective fields (one from the insurance industry, and this one from a fee-only financial advisor). In fact, today’s guest post comes from a fee-only planner who used to work for Northwestern Mutual in a previous life.
This particular guest post goes into the new fiduciary standard for those bearing the Certified Financial Planner marks, and the conflicts of interest that are present in the financial industry. If you don’t want to spend a ton of time figuring out who the “good” financial advisors are, then just visit The Physician Philosopher’s recommended financial advisor list! Today’s guest post comes from one of those recommended advisors, Donovan Sanchez, CFP® from SkyView Planning.
The Code, Conflicts, and Client Interests
Imagine that you walk into your doctor’s office because your allergies have been awful this season. He gives you a smile, says he’s got the right thing for you, and writes you a prescription. The medication works decently well—there were some uncomfortable side-effects that you would like to have known beforehand—but you shrug it off because it’s “what the doctor ordered.”
Later you find out that your physician was a “top producer” with the pharmaceutical company that developed the allergy medication you used. You learn that earlier this year he was brought on stage at an important annual conference in order to be recognized for the amount of allergy product he prescribed. His recognition included an award provided by the company for his hard work. This award included a cash bonus, as well as a vacation to the Ritz at Amelia Island in Florida.
After some research you discover (and you can’t believe this) that your doctor is not employed by the hospital, but by the pharmaceutical company that engineered the allergy product he prescribed you. You are equally shocked to find out that virtually all of the allergy medication your physician prescribes comes from the pharmaceutical company that he works for.
To top it all off, you learn that many independent physicians think the allergy medication you were told to use is vastly overprescribed. In fact, they argue that there are cheaper and more effective prescriptions for people with your type of allergy.
You begin to ask yourself if any of the medical advice you’ve received over the years really was in your best interests . . . or in your doctor’s.
Sound absurd? Fortunately in the medical world, this story is absurd. In the world of financial services, unfortunately, this story is all too real.
The CFP Board Code of Ethics and Standards of Conduct.
The allegory above highlights the problematic state of affairs in the financial services industry. Replace the physician with “financial advisor,” the allergy medication with a proprietary insurance or investment product, and the pharmaceutical company with an insurance or investment firm and you begin to understand why my field has a way to go before it is recognized as a profession similar to law, accounting, and medicine.
Fortunately, the CFP Board’s Code of Ethics and Standards of Conduct (with an effective date of October 1, 2019) is seeking to raise the bar (at least for CFP® professionals).
The document’s preamble clearly outlines its purpose. The Code of Ethics and Standards of Conduct “protects the public, provides standards for delivering financial planning, and advances financial planning as a distinct and valuable profession.”
All good things—especially the part about protecting the public.
The document outlines several duties owed to clients. Among these include a fiduciary duty that “[a]t all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client.” The CFP® professional is further required to put the client’s interests ahead of their own, as well as the firm by which they are employed.
This duty of loyalty demands that the CFP® professional avoid, or disclose, material conflicts of interest, “obtain the Client’s informed consent” and manage the conflict if the client chooses to work with the advisor. The CFP® professional “must adopt and follow business practices reasonably designed to prevent Material Conflicts of Interest from compromising the CFP® professional’s ability to act in the Client’s best interests.”
These requirements, which are only a few of those provided in the CFP Board’s Code of Ethics and Standards of Conduct, have especially interesting implications for CFP® professionals who work at firms that manufacture financial products (such as insurance products) for their “advisors” to sell.
Conflicts and compliance documents.
Financial Planning’s Tobias Salinger recently wrote an article titled, “Northwestern’s CFP disclosures put industry’s fraught questions in focus.”
His article includes a copy of a template disclosure document created by Northwestern Mutual that its CFP® advisors may use to disclose their conflicts of interest. The document provides an interesting look into the world of advisors at Northwestern Mutual, but highlights generally the conflicts that arise when an advisor’s employment is tied (in whole or in part) to a product producer.
Northwestern Mutual’s disclosure brochure includes instructions to the CFP® advisor that it is the advisor’s responsibility to determine how they disclose their conflicts of interest and that the advisor may use the template, alter the template with approval, or choose not to use it at all.
The document is full of notable disclosures, including the following:
“Pursuant to my Northwestern Mutual contract, my primary insurance product affiliation is with Northwestern Mutual, I primarily recommend, sell and service Northwestern Mutual insurance products, and I am required to meet annual minimum insurance production requirements established by Northwestern Mutual from time to time.”
“However, my contract does not otherwise limit my ability to recommend, sell and service other companies’ insurance products to any particular client so long as I meet my obligation to primarily recommend, sell and service Northwestern Mutual insurance products in appropriate circumstances.”
“Unless we have agreed that I will provide you with fee-based financial planning, I am compensated only when you ‘take action’ by purchasing insurance products, securities products, or investment advisory programs and services. This is a material conflict of interest because I am incentivized to sell you a product, program or service so that I will be compensated for the time I spend with you and the expertise that I provide to you.”
“This transaction-based commission structure is a material conflict of interest because it incentivizes me to sell Northwestern Mutual products to a client often and to sell Northwestern Mutual insurance products that pay the highest rates of commission and that have relatively higher initial and ongoing premium payments associated with them.”
This section goes on to provide an example of how the “advisor” is incentivized to sell permanent life insurance (whole life insurance) over term life insurance:
Highlighting other material conflicts of interests disclosed in the document, Toby Salinger notes, “[b]esides the commission for selling Northwestern Mutual products, the firm’s representatives earn cash bonuses based on production, credits and subsidies toward retirement and healthcare benefits, training allowances, awards, travel, gifts, prizes and other forms of compensation.”
Northwestern Mutual financial advisors may also receive compensation from investment products that they manage, however this compensation is influenced by their level of insurance production. Noting the apparent conflict, Salinger writes, “[i]nsurance sales relate to compensation for investment advice and planning. The investment product compensation grid gives higher pay based on representatives selling Northwestern insurance, and each of them is required to meet minimum insurance production requirements.”
With respect to managing these conflicts, the Northwestern Mutual disclosure document lists a number of items.
In this section (titled “How I manage Material Conflicts of Interest”), one statement reads “I know that in the long run, I will benefit most by serving you well. Your interests and my interests align in this respect because I rely heavily on the referrals I receive from satisfied clients. This in itself helps to mitigate the material conflicts of interest described above.”
Among other ways the document lists for how advisors manage conflicts of interest include the nature of Northwestern Mutual as a mutual company, the high quality of their products and “low relative expenses over the long-term,” and Northwestern Mutual’s compensation practices.
This last item is interesting considering that the document discloses important material conflicts of interests with respect to the company’s compensation practices. Can a conflicted compensation practice also be the means of mitigating and managing the material conflict of interest?
This seems unlikely.
Client interests and what the thoughtful physician (or consumer) can do.
For the physician navigating the world of “financial advisors” it can be difficult to know what you’re getting into. Therefore, the following questions may prove helpful in understanding if you’re partnering with a professional financial advisor, rather than a professional financial salesperson.
Did your financial advisor or CFP® professional disclose material conflicts previously?
For those of you already working with a financial advisor, it’s worth thinking about whether or not material conflicts were disclosed when you engaged their services. Did they explain how their relationship with their parent company might influence the advice they provide?
If you find yourself with a whole life insurance policy or annuity, the above question may be especially relevant. Earlier this year I wrote a blog post titled “Confessions of a Financial Advisor” that appeared on The White Coat Investor. This article, as well as others, have led to numerous physicians reaching out to me with concerns that a whole life insurance policy they were told to purchase really wasn’t in their best interests.
If you feel like your financial advisor too often wants to talk about your insurance planning as opposed to your student loan or investment situation, you may be working with a professional financial salesperson. If your “advisor” sold you whole life insurance as an investment vehicle, “rich man’s Roth IRA,” or as a tool to avoid paying taxes, you should seriously question whether your “advisor” was putting your interests before their own.
Did your financial advisor or CFP® professional clearly explain how they are compensated when you started working with them?
I write a lot about financial advisor compensation because I believe that it will tell you more about your relationship with your advisor than any other thing.
Does your “advisor” provide “free” advice?
If so, you’re likely working with someone paid on commission for selling you a product. This “advice” eventually and necessarily leads to a product sale, otherwise how would they provide for their individual and family needs?
Be careful here, because even fee-only financial advisors have material conflicts of interest that you need to be aware of. The advisor who you pay through 1% of assets under management has a material incentive to get you to transfer more of your investments to their management.
As The White Coat Investor writes in The White Coat Investor’s Financial Boot Camp:
Also be aware that even fee-only advisors can have biases and conflicts of interests. For example, if the advisor is only paid on a percentage of assets under management, they may recommend an IRA rollover that is ill-advised (which would increase assets under management), recommend against paying off student loans or mortgages (which would decrease assets under management), or recommend against investments that they would not manage such as real estate. (116)
Know how you’re paying your advisor and ask them how this might affect your relationship. Then take time to think about what they say.
Determine the advisor’s total annual fees and ask yourself if the cost is worth the value of services provided. With a growing number of advisors charging flat annual fees for comprehensive financial planning and investment management, make sure you’re not overpaying for this important service.
Some final thoughts.
While every firm has conflicts of interest to manage, consumers will need to determine if they are comfortable with their advisor navigating the material conflicts of interest existing at firms that engineer financial products for their advisors to sell.
If your advisor has left you feeling uncomfortable about their recommendations, it may be time to take your best interests in mind and seek out a professional who can clearly answer your questions and whose business model and compensation structure are better aligned to serving your needs.