Financial Advisors: what they do

May 9, 2022

In this podcast, John Maher chats with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts, about financial advisors. Brennan explains the requirements to become a financial advisor. Then, he talks about the different types of financial advisors, their payment structure, and what they do for clients.

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Podcast Transcription:

Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, our topic is financial advisors and what they do. Welcome, John.

John Brennan: Hi, John, how are you?

What Is a Financial Advisor?

John Maher: Good, thanks. So John, let's start at the beginning. What is a financial advisor?

John Brennan: Well, in truth, anybody can call themselves a financial advisor. If somebody calls themselves a financial advisor, all they have to do is write that next to their name on their business card. It means it's really not anything distinct.

John Maher: There's no certification or something like that you have to go through?

John Brennan: Correct. All it is is a self-title. However, there are certain types of financial advisors who I still think that sort of imprint or that people still have that sort of association with financial advisors. I feel with any kind of financial advisor, they think, "Oh, he's going to try and sell me something," right?

John Maher: Right. "Hey, I've got this hot stock for you. You got to buy it today. And then in two weeks we're going to dump it and you're going to make a million dollars," and that kind of image.

John Brennan: Yes. Bingo.

John Maher: Yeah.

Types of Financial Advisors

John Brennan: So there is that type and those guys still exist. I did notice ... Well, and it's changed somewhat because now that people don't answer their phones, it's not quite the same thing. The other kind is we hear the distinction, financial advisors, oftentimes specialists in insurance, or say somebody who works with Prudential or Pacific Life or a big outfit like that, the Hartford... I'm sure there's some CFPs and I'm sure there are some guys who just call themselves financial advisors.

And here in this setting, they're sort of in a silo that is say, Hartford is selling Hartford products, and it's really based around sales of life insurance, annuities, which are financial products, and probably some investment pieces as well, so that's another sort of arena where you'd see someone calling themselves a financial advisor.

John Maher: And that's like an insurance broker, that type of person?

John Brennan: Yeah, right.

John Maher: Okay.

John Brennan: And then there's people who are kind of a hybrid. Okay? They're a series seven certified meaning they're an SEC regulated broker. We can and get more into this in a minute, and then there's the last kind is really what I am, which is a fiduciary.

What Is a Fiduciary?

John Maher: Okay and what is a fiduciary? Tell me a little bit more about that.

John Brennan: What a fiduciary is is someone who is held to the standard of putting their clients best interests first. It is a legal standard. Fiduciary standard exists in several areas of the financial world, and a fiduciary is someone such as someone who is the personal representative or executor for an estate, somebody who is the trustee of a trust, or somebody who is perhaps a durable power of attorney for somebody else. These are relationships of high trust and confidence where you hold to the standard of putting the client's interest first.

You cannot sell them something or really even offer them something that is not putting their interests first. On the brokerage side of the business, and I'm not knocking these guys because there's plenty of good brokers, it's a different standard. It's a suitability standard, okay. The investment has to be suitable for the client. The fiduciary standard is it has to be in the client's best interests.

Financial Advisors Standards

John Maher: Okay. Could you go into some more details about those standards and how that works?

John Brennan: Sure. I'll tell you a story. Once upon a time, 1920s, America, stock market is booming, blazing, okay. All these hot stocks, people are making all kinds of money. And then what happens? There's a crash, after the crash, the US government and the 33 Act created the SEC (The Securities and Exchange Commission) because they realized the harm that this crash had done to the economy.

So the SEC became a federal institution, which then went on to regulate essentially stock brokers. Okay, and these are guys who hold a series seven license, and they're held to a suitability standard and the idea was to sort of reign in the wild west, so to speak, okay. Curb, some of the excesses that happened that led to the crash, however our business, the trust business had already existed prior to even the stock markets trust had been around for a long, long time and banks had been performing trust work for a long time.

John Maher: So that originated from the banks, the trust that's where that came from?

John Brennan: Yes, and it'd been around probably really for centuries beforehand. So, but in the US, it had been around as well. And so in the creation of the SEC they had a carve out where they said, okay, you bank trust departments, you've existed for a long time, you've proceeded all this, you are not SEC regulated. You are, even though you're selling financial products and talking to people about financial products, you do not have to get SEC licensed.

However, what that means, what it meant is you're going to be under the auspices of the FDIC. So instead of being SEC regulated our bank trust department is FDIC regulated, So that means there's an audit requirement. Once a year, either the state of Mass, the Commonwealth of Mass, or the FDIC comes in, looks at everything we do, makes sure it's up to snuff and performs a written audit on our doing. So, essentially there's two different regulatory schemes, okay.

For financial advisors on the national level, the SEC regulation and the FDIC fiduciary regulation underneath that umbrella, anybody in the world can call themself a financial advisor, no distinction anybody in the world could call themselves a financial planner without any qualifications. But if you're a CFP, if you are a CPA, or if you're a CFA, you've had to study some kind of subject matter, you have to have a certain amount of subject matter competence and expertise, and you have to keep up with goings on in the financial world via continuing education requirements.

What Does a Financial Planner Do for Clients?

John Maher: Okay. So talk a little bit about what a financial planner or a certified financial advisor does for one of your clients kind of on a regular basis.

John Brennan: Yep. So what I do… the CFP what that means, that really means personal financial planning. That means the economy of the family. That means people saving money to buy a house, saving money to put their kids in college, saving for retirement, those kinds of nuts and bolts of a family's financial ecosystem.

A chartered CFA is really going to be somebody who specializes on the investment side, maybe less consumer facing, but analyzing stocks, analyzing companies, analyzing mutual funds, et cetera. And then the certified public accountant is someone who really specializes in accounting and they also can represent a client before the IRS. They can be a legal representative for a client before the IRS. So each of these three distinctions really kind of have three areas of specialty.

John Maher: Okay.

John Brennan: Another area where you would see the fiduciary standard is you hear this debate, this has been a national debate over the last few years is in the employee retirement space. There's a federal act called ERISA, which regulates pensions and defined benefit retirement systems and ERISA is another place where there'd be a fiduciary standard. So somebody who's in charge of your 401k, there's a fiduciary standard, probably underlying that as well.

Cost of a Financial Planner

John Maher: Okay. A final thing that I'm sure a lot of people have a question about is, what is this cost to have a financial planner and work with somebody who's going to help me to plan for my retirement, like you said, plan for putting my kids through school and help me with all of the things that I have to juggle in order to do that, make sure that I'm going to be okay once I retire.

What is that going to cost me? And where does that money come from? Do I just pay somebody? And it's on like a monthly fee, does it come out of the money that I get from investments? How does that all work? And I'm sure that, very much like a lawyer, sometimes you end up not paying a lawyer directly. Sometimes it comes out of a settlement or something like that. So, yeah. You know, how does that work with a financial planner?

John Brennan: So a broker is typically somebody who's earning a commission as you come in and out of the market, meaning, they put in the order, there's a commission for that order. And then say, if you're buying a mutual fund, there might be a load. A load is a fee that your investment, as you invest in a fund, you can have a load as you enter the fund, you can have a load as you exit the fund. And sometimes there's a fee which trails the fund, which goes back to the broker. So that's one version and it's really sort of the commission standard, the other and that's also true with if you're buying, say insurance, if you're buying an annuity, really a commission based product.

John Maher: Yep. And again, the hope with that is that, they're getting these fees when you maybe make transactions you're buying or selling or things like that, or, or just general fees, but the idea would be that your investment is going to outpace that, right? So that you're still making money on your investment and some portion of that is going to be going to the broker in fees. So you're not paying, you're not paying out of pocket for that as such.

John Brennan: Well, you are. I mean, if you're buying 500 bucks, there could be a $40 commission, $50 commission. You would pay out of pocket. There are fees within funds you wouldn't see, so fee within a mutual. This is a big area that people have talked about, an expense ratio type fee in a mutual fund. Most consumers don't really see that we can revisit that in just sec.

The other kind, and the other way advisors get paid is working with a portfolio in toto. Meaning if you have a million dollar portfolio, there is an assets-under-management fee. So your fee is based upon the total amount of assets the portfolio is looked at in toto, meaning, you're not paying to get the Coca-Cola stock or the GM stock or the Apple stock. It's all under one umbrella and so each year there's probably a percentage, 1% or less of the portfolio, which is the fee that goes to the manager.

John Maher: Okay.

John Brennan: So those are the big two, commission based and then assets that are management based.

John Maher: Okay.

John Brennan: You know what, it's a good example, Vanguard, which most people have heard of, big mutual fund company. They are known in the industry because they essentially automated a certain amount of investing and it made very low fees within the funds itself. So that's just kind of an example.

John Maher: Okay, but you're not going to get from Vanguard the same kind of personalized financial planning necessarily that you would by hiring a CFP, correct?

John Brennan: Correct.

John Maher: Okay.

John Brennan: Yep.

John Maher: All right. Any sort of final thoughts on financial advisors, financial planners, and how they're used and what people, any break recommendations or tips for people.

John Brennan: If you're confused, you're not alone. I think the marketplace is confusing because anybody can call themself a financial advisor. All you got to do is write that next to your name, but bear in mind that there are key distinctions and there are licensing's and educational requirements, which go with certain certifications.

John Maher: All right. Well, that's great advice, John. Thanks again for speaking with me today.

John Brennan: Sure. Thank John.

Contact Cape Ann to Set up an Appointment With a Financial Advisor

John Maher: And for more information, contact Cape Ann Savings Trust and Financial Services at 978-283-7079. Or visit the website at capeannsavings.bank.

Investments purchased through the Cape Ann Savings Trust and Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.