Cacti and Poison Ivy

You don’t have to be a botanist to know not to jog naked through a cactus grove.  Even an idiot can see the danger in that.  People like to think that identifying investment dangers is just as easy.  You’ll know when someone is taking advantage of you or a loved one, right?  Rather than a bramble of cacti, the investment landscape is a beautifully manicured garden.  There are so many plants in this garden that many people seek out a guide, but few make the distinction to search for a good guide.  They merely grab whoever’s most convenient and wind up with a case of poison ivy or worse.  The kind of guide investors need is called a fiduciary.

When it comes to finance, the US is mis-regulated.  Small banks are at a disadvantage due to the costs of complying with rules meant to rein in mega-banks.  Well-meaning legislation (like FASB 157) can snowball into systemic disaster.  One rule that should have been enacted a long time ago, however, is a fiduciary rule.  A fiduciary must put the considerations of their client before their own and disclose any conflicts of interest.

Three Kinds of Advice

“Free”

You can probably walk into your bank today and get “free” financial advice, but you and I both know that there ain’t nothin’ in this life for free.  Investment choices are limited to a few mutual fund families.  Or maybe you heard the guy on AM radio offering an investment where you don’t lose money when the market is down, but you participate in the market’s gains.  While you might not be directly paying the salesman, you are paying some hefty up-front and ongoing fees whether they’re pushing front-loaded mutual funds or equity indexed annuities.  A portion of these expenses then gets passed to the salesperson.  These people are not on your team.  All they’ve got is a hammer and everyone’s financial situation looks like a nail.

The Broker

You’ve made it.  You’ve got an entry-level luxury vehicle (or maybe you drive a Dodge Stratus, whatever) and now you can brag about your portfolio by dropping the name of the big Wall Street firm that manages it.  Their offices have marble flooring in the lobby and you suspect there is a communal hair product fountain in the employee lounge.  These are the guys fighting against the fiduciary rule.  You pay a fee (hey it takes money to make money, right chief? *double finger-point + wink*) and a commission on trades.  You get a statement which shows you how much money you’ve got, but doesn’t really show any meaningful performance data.  Investments almost always include some form of in-house product whether it’s a mutual fund or a trading account.

The great American wordsmith Nelly once said, “I went from broke to having brokers; my price range is Rover”.  Nelly is back to being broke.  I wouldn’t lay the blame solely at the feet of Nelly’s (apparently multiple) brokers, but they certainly didn’t seem to have his best interests at heart.

Fiduciary

A fiduciary is required to put your interests before theirs and to disclose conflicts of interest.  They generally charge a percentage of your assets or a flat fee which means they do not get paid to sell you a particular product.  This means they are free to recommend any (appropriate) investment out there.  Disclosure: I work for a Registered Investment Advisor (RIA) that is a fiduciary.

The Argument Against Fiduciary

Opponents of a fiduciary rule argue that it would raise the cost of servicing smaller accounts, pushing financial advice out of reach for Main Street Americans™ and leaving their retirement dreams unfulfilled.  Of course this is bullshit.  Vanguard, Wealthfront, and Betterment are just three firms that responsibly handle these kinds of accounts.  More and more fiduciaries are adopting the Wealthfront and Betterment “robo-advice” models, too.  If you’re looking for a financial advisor ask if they are a fiduciary and ask how they get paid.  These are questions that should be easy for your prospective advisor to answer.

It’s a jungle out there, filled with both pretty and thorny vegetation.  A fiduciary rule would help label the dangers so you know where/who the pricks are.  Until this gets legislated properly it’s up to you to seek out a fiduciary.