The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

Whose Interests Come First? - Part Three

September 2015

When I began this series in March, I did so with an optimistic belief that a new fiduciary standard would soon become the law of the land.

After all, the debate over how to better protect investors from the rampant conflicts of interest in the financial services industry has been underway for years. In fact, I first wrote about the proposed changes in February of 2011 (The DOL Says No Advice Is Better Than "Schlocky" Advice).

After all, the White House Council of Economic Advisers estimates that the lack of a uniform fiduciary standard costs investors $17 billion per year.

Yet, here we are, heading into fall and there is still no resolution.

Is it really that difficult for everyone to agree that the interests of someone saving for retirement should come before the interests of that person’s advisor?

Michelle Singletary of The Washington Post wrote the following in her September 12th column (Is your adviser truly protecting your retirement?):

“The rules on the books now make for an uneven playing field for many of today’s investors, many of whom are overwhelmed by the options and could use some professional guidance. We need to ensure that people are getting the best advice possible to manage their savings, especially when it’s probably all they’ll have to lean on in retirement.”

The good news is that the playing field doesn’t have to be uneven. Unbiased, quality advice is already available, even without a new fiduciary standard.

Maybe my hope for a new fiduciary standard should be replaced by a hope that more individual investors, foundations, and corporate retirement plans simply become aware of their options.

If the government doesn’t force advisors to put their clients’ interests first, then perhaps those clients will gravitate to fee-only firms like Capital Directions.

Maybe this lack of a new fiduciary standard isn’t such a bad thing after all…


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Whose Interests Come First? - Part Two

May 2015

“All advice should be in the best interest of the consumer. Bad financial advice is just wrong – period.”

That was the quote from Jo Ann Jenkins, CEO of AARP, which I used to close my most recent post highlighting the Department of Labor’s (DOL’s) new fiduciary proposal.

You would think it would be hard to argue with Ms. Jenkins’ comment. Yet stock brokers and the insurance industry have come out voraciously against the DOL’s suggestion that anyone providing investment advice to 401(k) participants or IRA holders be legally required to put the interests of the investor ahead of the interests of the investment adviser.

The gist of the broker’s argument seems to be that it is in a client’s best interest that the broker NOT act in the client’s best interest.

And now they have at least one member of Congress on their side. Rep. Ann Wagner of Missouri (whose district just happens to include the home of Edward Jones, the brokerage firm with the most offices in the U.S.) recently had the following to say to brokers gathered at the Congressional Conference of the National Association of Insurance and Financial Advisors (NAIFA) regarding the DOL’s fiduciary proposal:

“We’re at war with the Department of Labor. I need you to be tough. If push comes to shove…by God, we’ll just defund them.”
                                                             - Investment News, May 20, 2015

She went on to express the concern that requiring brokers to put their clients’ interests ahead of their own would ultimately raise regulatory and liability costs for brokers to the point that brokers could no longer serve “the middle-income market of retirement savers”.

And so goes the broker’s argument:

If you force me to put your interests ahead of my own then I won’t make enough money to make you worth my while.

Pardon me if I don’t feel pity for Joe Broker.

If the DOL’s fiduciary proposal becomes law and brokers choose to stop working with 401(k) plans and IRA holders, there are thousands of capable Registered Investment Advisors (RIAs) around the country who will gladly step in to serve those clients and to put the clients’ interests first.

The final weeks of debate over the fiduciary proposal should be very interesting for those of us committed to helping 401(k) participants and IRA holders save for a secure retirement.


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Whose Interests Come First?

March 2015

Here’s the scenario…

Patient: “Hi Doc, I came to see you today because I’m really not feeling well.”

Doc: “Tell me more about that.”

Patient: “I’m running a fever and coughing like crazy.”

Doc: “Okay, I know exactly what’s wrong. Here, rub this topical ointment on your feet and you’ll be fine. Just pay this invoice on your way out. Good to see you (with a firm handshake and a slap on the back).”

Patient: “But Doc, I’m not sure you heard me. I’m running a fever and coughing like crazy. What good is an ointment going to do?”

Doc: “Oh, I didn’t say this would cure the virus that you have, I just said I knew what was wrong. I gave you the ointment because the insurance company pays me $300 for prescribing that and they only pay me $200 for prescribing an antibiotic…”

No way this would ever happen, right? Of course not. It’s unrealistic. The physician would be sued for malpractice. Yes, he prescribed medicine, but it clearly wasn’t the right medicine.

But let’s consider a more realistic scenario in the world of investment advice…

Investor: “Hi Advisor, I came to see you today because I need some help saving for retirement.”

Advisor: “Sure, I know exactly what you need. Buy this mutual fund and you’ll be all set. Good to see you (with a firm handshake and a slap on the back).”
Realistic? Sure, this scenario plays out all the time.

But did the advisor follow the path of our imaginary physician and recommend the investment that paid the advisor the most commission, or did he recommend the one that was truly in the investor’s best interests?

Many investors in this situation today don’t know the answer to that question. And current rules and regulations say that’s okay. But that may be about to change.

For years, the Department of Labor has been pushing to change the rules governing the advice provided on 401(k) plans and IRAs. As it stands today, that advice is provided under two scenarios:

· The Suitability Standard – Is the investment merely appropriate for the client’s personal situation? This standard typically applies to advisors working for a brokerage firm or insurance company.

· The Fiduciary Standard – Is the investment in the client’s best interests? This standard applies to registered investment advisors (RIAs).

Under the Suitability Standard, an advisor could legally “prescribe” Mutual Fund A (the “ointment”, paying a commission of $300) over Mutual Fund B (the “antibiotic”, paying a commission of $200), even if Mutual Fund B was the best option for the investor.

Does this actually happen on a regular basis? There’s no way to know. But today’s current regulations do set the stage for conflicts of interest like this that allow some advisors to put their own interests ahead of their clients.

In contrast, an advisor under the Fiduciary Standard is legally required to put a client’s interests ahead of their own. Recommending a topical ointment when an antibiotic was clearly needed would not only be immoral, but would actually be illegal.

But yet many 401(k) plans and individual investors unknowingly continue to work with advisors who aren’t under the Fiduciary Standard.

That may finally be changing. The White House recently called for tougher consumer protections for investors:

“Right now, there are no uniform rules of the road that require advisors to act in the best interests of their clients…and that’s hurting millions of working and middle-class families.”

At the same press conference, Jo Ann Jenkins, CEO of AARP, echoed that sentiment:

“In today’s world it’s hard enough to save for retirement and achieve your financial goals. We don’t need to make it more difficult by allowing some in the financial industry to take advantage of hardworking Americans. All advice should be in the best interest of the consumer. Bad financial advice is just wrong –period.”

As an independent, fee-only, registered investment advisor, Capital Directions has always served under the Fiduciary Standard. We know that putting our clients’ interests ahead of our own is smart business.

We may not be in the minority much longer.

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The Power of Listening

January 2014

I have a confession to make. I have a friend who is a broker. There, I feel better getting that off my chest.

Aside from having built a very profitable book of business by the sheer force of his personality and some very aggressive sales tactics, along with jumping from one brokerage house to another for a hefty payday, he’s actually a good guy.

I recently ran into him at a holiday party and he blurted out the following:

“You know, John Smith (the CFO of one of my 401(k) clients; not his real name, by the way) paid you a great compliment recently.

He said that they chose to go with you for their 401(k) plan because you were the only advisor who came in, asked questions and actually listened to their goals for the plan.

John said everyone else came in pitching their product and bragging about how great they were.

You know, I’ve shared that with our team and we’re really going to try to listen more and talk less…”

I tried to be gracious and just said “Thanks for sharing that”, but I couldn’t help but think to myself “Really? They don’t teach that on the first day of “Broker School”?”

But in reflecting back on it later, I was reminded of just how different the Registered Investment Advisor (RIA) business model is when compared to the brokerage firm model. As an RIA, I am legally obligated to put my clients’ interests ahead of my own. Brokers aren’t held to that same fiduciary standard.

Knowing that the brokerage business model is based on selling product, not on meeting clients’ needs, maybe I shouldn’t have been so surprised that actually listening to a client seemed like such a novel idea to my friend, the broker.

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