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Financial Planning Industry In Flux

Charlie Schlenker
Ed Gjertsen is an ISU alum and and past president and chairperson of the National Board of Directors of the Financial Planning Association.

To most Americans the "fiduciary rule" on financial planning might not mean a whole lot. But for financial planners, stock brokers, and investment advisors, it's a really big deal.

It raises the standard for those people to serve their clients from giving advice that is suitable for their clients, to giving advice that is in the clients' best interest. In practice, this might greatly increase the level of work for financial advisors in getting to know clients and their needs and desires.

Ed Gjertsen is an Illinois State University alum and past president and chairperson of the National Board of Directors of the Financial Planning Association. He spoke at ISU last week.

"It's hard to argue that you shouldn't have the best interests of your client at heart. And so there are some in the industry that say well, we already have a relatively high standard which for people who are on a commission is the suitability standard," said Gjertsen.

The rule took effect in April for some financial advisors. Others are not required to implement it. Some of those brokers are doing so anyway in the belief that it will be required and in the interest of uniformity across the industry.

The practical difference between suitability and fiduciary standards can look something like this. An investor wants a growth fund. The financial advisor picks out a fund under the suitability standard that meets that criteria and discloses the fees involved. Under the fiduciary rule, the advisor would be obligated to have a further conversation with the investor about tradeoffs between fees and reliability of that fund. That might result in the choice of a fund with lower fees or a fund that has no affiliation with the investment firm.

"In reality would the conflict of interest rule change business practices as they are today? The answer is yes, but in different ways for different groups," said Gjertsen.

The rule also opens up the retirement investment industry to the possibility of class action lawsuits, said Gjertsen. Previously most agreements with investment advisors required mandatory arbitration to avoid just that possibility.

Gjertsen said the extra work that it takes to know the client's interests in detail may result in investment firms taking a pass on people with fewer assets because the fees will not be worth the time involved to present the best possible advice for that client.

It's possible that will shift the marketplace from predominantly straight commission to fee-based annual management services.

Gjertsen said for small investors left out of that marketplace or shipped to an 800 number call center, someone will invent a new business model that will allow cost effective service to that kind of investor. He said some are already experimenting with an arrangement perhaps similar to a monthly health club membership involving small monthly fees for fiduciary oversight.

Listen to Ed Gjertsen's entire interview.

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WGLT Senior Reporter Charlie Schlenker has spent more than three award-winning decades in radio. He lives in Normal with his family.