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Beware the Self-Proclaimed Fiduciary

 

Short Version

Hypothetically, the noun “fiduciary” (“Are you a fiduciary?”) denotes a financial adviser who acts in his clients’ best interest (or her clients’…for simplicity and correct grammar’s sake, I’ll stick with he/his in this post).

As an adjective, fiduciary means “in the client’s best interest” (for example, “fiduciary advice”).

Therefore, many people who seek financial advice rightly want to work with a fiduciary because they want fiduciary advice.

But in the real world of financial services, “fiduciary” is too often deceptively and manipulatively used. Many advisors claim to be fiduciary who are clearly not. And many people get taken advantage of by them. 

Eliminate that possibility for yourself by asking two questions of your advisor. The first is, “How are you paid?” The second is, “How much, in total fees and investment costs, will I pay?” You cannot assure that your best interest will be served without having good answers to each.  

And know these things:

  • If the advisor is paid based upon what he sells you, meaning by commission or sales load for selling you products or investments, that advisor cannot serve your best interest.  

  • If the advisor is paid as a function of how much money or income you have and charges fees as some percentage of those, that advisor cannot serve your best interest. 

  • If what you pay an advisor in total fees and investment costs is clearly exorbitant, your best interest cannot be served. 

If having your best interest served is your top priority, find an advisor whose pay structure at least allows for it to be served. That will be an advisor who is paid a defendable fee for advice, be it hourly, one-time project-based, or a fixed or flat retainer fee. 

Longer Version

As a professional adviser, and one who takes pride in always serving his clients’ best interest, I say the financial services world would be much better and fairer for consumers if the word “fiduciary” didn’t exist.

How’s that for irony?

That’s because “fiduciary” is too often used by advisors who self-describe as fiduciary, yet who demonstrably serve their own best interests, not their clients’.

So, if I were king for a day, I would ban the word “fiduciary” and mandate a focus on its meaning: that the client’s best interest be servedAnd that is easy to determine.

All it takes is asking a couple common sense questions, neither of which is, “Are you fiduciary?” or, “Will you act in my best interest?”

Are you a good person? Can I trust you?

Imagine you needed the help of a good and trustworthy person to assure the well-being of your most cherished loved ones. And, imagine that you had to pay a significant fee for that service. And, imagine that you had some time to make the evaluation of that person (think days or weeks, not minutes). And, imagine that you had the ability to know how the person acted in certain situations.

If your loved ones’ well-being was in the balance, and knowing that this potential helper-person would receive a significant fee if you chose him, would you simply ask him if he was a good person? Would you simply ask him if he was trustworthy?

I sure hope not. Given the fee at stake, how would you expect the person to answer?  “I’m glad you asked that! Actually, I’m a lousy person, and no, I’m not trustworthy at all. It’s in your best interest to look elsewhere to pay such a large amount for such an important job.” So would say no person on Earth, ever, with a lot of money on the line.

But if you had a way of knowing how the person acts in certain situations, such that you could confidently conclude, yes, he is (or no, he is not) a good person, and yes, he is (or no, he is not) trustworthy, would it not behoove you to judge based on his actions (and not his words)?

Do not actions speak louder than words? Is talk not cheap? Are those sayings not the epitome of simple wisdom about human beings?

Indeed, they are! So let’s apply them to financial advisors.

Two Questions That Shine The Light On “Fiduciary”

What two questions to ask financial advisors are much better than, “Are you fiduciary?” and “Will you act in my best interest?”

This one: How are you paid?

And this one: How much, in total advisory fees and investment costs, will I pay?

If you get good answers to both, you are much more than “halfway-there” to identifying a true fiduciary adviser.

So ask them. They will tell you almost everything you need to know. (I would argue that investment philosophy, planning philosophy, and tax expertise also matter and should be understood, but let’s keep this fiduciary consideration simple for now.)

If the advisor is paid by commission or sales load for selling you products or investments, that advisor cannot act in your best interest. The simple reason is commissions and sales loads are in the advisor’s best interest, and no one can serve two masters. If it’s in the advisor’s best interest, it cannot be in yours.

Beyond commissions and sales loads, if the advisor is paid some percentage of a client’s assets, that advisor cannot truly act in the client’s best interest, for two primary reasons. The first is that the advisor’s clear incentive is to keep the client from doing anything to liquidate the portfolio, thereby reducing the advisors fee income (based as it is on a percentage of the assets), which taints any advice the advisor would offer. The second is that percentage-based fees quickly rise to exorbitant levels, and paying exorbitant fees is obviously not in any client’s best interest. At some point, fees become unreasonable and not defendable given the work done on the client’s behalf. Percentage-based fees often quickly get there.

Words That Don’t Matter-Common Advisor Proclamations of Fiduciarity

“I’m a Registered Investment Adviser.  That means I’m legally required to act in your best interest.” That is true in the letter of the law, but too often not true in the real world. A lot of Registered Investment Advisers are licensed to sell, and do sell, commission-based insurance products. They therefore cannot act in your best interest, even though they proclaim to.

“I’m fee-only. I cannot accept commissions. Therefore, I only act in your best interest.” Again, often, simply not true. A lot of fee-only advisors charge their clients exorbitant percentage-based fees on assets under management. Those fees can produce staggering effective wages of thousands of dollars per hour and more, which is why the money management industry is so notoriously profitable. Being fee-only is better than selling by commission or sales load, but it is not, in and of itself, indicative of “fiduciary.”

“I’m a Certified Financial Planner™ Professional. I’m obligated to act in your best interest by the CFP® Board.” Again, far too often, it doesn’t happen. Plenty of CFP® professionals sell commission- and sales-load-paying products. The great majority charge fees as a percentage of assets under management. And the CFP® Board is notoriously lax in enforcing its code of ethics.

Trust.  But Verify.

To maintain your dignity, and to ensure the integrity of any advisor with whom you work, heed the words made famous by President Ronald Reagan: trust, but verify.

Maybe your advisor is truly fiduciary. But if you want to be a savvy financial services consumer, if you want to make sure your best interest is being served, there’s a little more work for you to do.

Don’t rely on any regulation or the federal or state government to protect you, because they won’t. Don’t count on the Certified Financial Planner™ Board’s stamp of approval of an advisor, because you can’t.  And don’t rest easy thinking you’re working with a “reputable” company, because “reputable” really means “recognizable” most of the time. 

It’s a caveat emptor/buyer beware world in financial services. If you want your best interest met, protect yourself. It’s okay to trust, as a start. But verify. Ask those questions. That is the only reliable way.

And remember, if an advisor is paid based upon what he sells you, or if an advisor is paid as a function of how much money you have, that advisor cannot act in your best interest. Can not; it is a human impossibility.

If your own best interest is your top priority, find an adviser whose compensation is structured to protect your best interest. Pay a clear, fully-disclosed, defendable fee for advice, whether that fee be hourly, one-time project-based, or a fixed annual amount.

If you’re not sure where to find such an adviser, here’s a decent place to start.

 
Jack Zarinsky, CFP®