The F Word
Of course I’m speaking of fiduciary, a word that has been largely unknown in the investment world until the past several months.
An attorney friend calls a fiduciary relationship one of working on behalf of a client ‘in utmost good faith’. The Legal Information Institute at Cornell Law School offers a slight more complex definition, including requirements such as a duty of care, a duty of loyalty, a duty of confidentiality and a duty of prudence. A simple definition from Dictionary.com: a person to whom property or power is entrusted for the benefit of another. In today’s context, this fiduciary duty of care can apply in either of two ways. For some financial advisors, it is owed to you, the client. For those who are salespeople it goes the other way. Whether working for an insurance company or a brokerage firm, salespeople owe that duty of care to their employer, not their customer.
In other business situations, the nature of the buying/selling relationship is usually quite clear. As the folks at national investment advisory firm Hightower Advisors say ‘You wouldn’t expect your butcher to give objective dietary advice’. Likewise, when buying a car you already know that the salesperson represents the dealership, not you. It’s obviously that person’s job to sell a car at the best price possible for the dealer while you’d prefer to pay something less. A few years ago, used car sales site Autotrader found that less than one-half of one percent of those polled were satisfied with the way the new car selling process works. Even with the advent of internet data, it’s simply not possible to know exactly how good a deal you made.
Unfortunately, things aren’t much different in the world of financial planning and investments. Salespeople are allowed by their regulators (who come from the industry itself) to call themselves pretty much anything they want: advisor, planner, consultant. Industry regulator FINRA tracks 175 ‘designations’: sets of letters which might appear behind the salesperson’s name. Of those, only eight are in some way accredited. If your advisor’s designation isn’t among those, you might want to consider whether the letters confirm specific competencies or are merely sales-enhancing window dressing. Regardless of title and/or letters, it’s estimated that over ninety-five percent of such advisors are compensated via commission just as most other salespeople are.
According to Department of Labor research, most people believe their investment advisor is already obligated to act in their best interests. Since that’s not the case and violations of trust are so common and potentially so serious, the DOL has released new regulations to address the issue. Basically, individuals providing any sort of advice related to retirement plans are now obligated to exercise their fiduciary duty towards the client, not their employer. Many companies in the securities industry, along with the US Chamber of Commerce, are lobbying against the rule. Multiple delaying lawsuits have been filed, so only time will tell if the rule will remain in effect.
I’m not sure that conflict-free advice is ever going to be a reality, regardless of regulation or intention. As the fiduciary rule begins to go into effect, some brokerage firms are taking the position that disclosing potential conflicts is all that’s required for compliance. For example, if their brochure states that salespersons are paid more for selling one mutual fund than another, that’s suitable disclosure. On the other hand, neither your doctor nor I can continue to charge you if we don’t believe we have more to offer. That’s managing a potential conflict of interest, something that I think is at the core of a true fiduciary duty of care.
Here’s a sampling of unattributed slogans from various investment and insurance companies. See if you can tell which of them owe a fiduciary duty of care to their clients:
-Go Ahead, You Can Rely on Us
-We’ve Got Your Back
-We’re Big, Safe and Friendly
-On your side
-A financial plan designed to help you grow that grows right along with you.
-Life Well Planned
The answer, as you probably guessed, is none of the above. The only way to be sure your advisor is putting your interests first is to ask that she or he sign a fiduciary pledge before the engagement begins.
Not understanding the difference between a sales relationship and a fiduciary one can cost investors a significant amount of money over time so it’s an important topic. However, an article like mine is not necessarily entertaining. For a more amusing but equally instructive perspective, you might enjoy watching a 20 minute segment of the John Oliver show in which he describes what happened when he tried to start a retirement plan for his staff.
Commentary supporting or vilifying the new rule is all over the media so I’m sure you’ll be hearing more about the ‘F word’ in the future. If you’re interested in a more detailed view of the situation, here’s a link to an article published by the Consumer Federation of America: Financial Advisor or Salesperson?.
In closing, let me quote Tammy Duckworth, author of a June 2016 New York Times op-ed piece titled Isn’t Honesty the Best Policy? ‘If the fiduciary standard is good enough for medical care, legal advice and accounting, it is good enough for financial retirement advice. We don’t accept less anywhere else in commerce. Why should we accept it from those we trust to protect our retirement savings?’ Perhaps in the near future, your own advisor will begin putting your interests first as WWA has been doing since the practice began.