Fiduciary: n. from the Latin fiducia, meaning “trust.” For Registered Investment Advisers, the legal obligation to always put their clients’ interest first and be proactive in disclosure of any potential conflicts of interest.
Contrast that with a commissioned salesperson.
When you buy a car you know that the salesperson is going to earn a commission. You know the salesman is there to sell you a car at the highest price you’ll accept and then try to get you to sign up for extras. It’s your job to do your homework beforehand; know what you need and can afford, and then fight for the best deal you can. Caveat emptor– buyer beware.
Unfortunately, in the arena of financial services it’s also caveat emptor. You may think that the commissioned salesperson is there to help you. They may call themselves “financial consultant,” financial advisor,” or “financial planner,” and may have a business card with some interesting initials or designation as a V.P. Regardless, if they are paid commission, they are generally focused on selling you products that are best for them and their employer, not you. There is a fundamental conflict of interest that works against you. Often the highest commissioned products include large upfront and/or ongoing fees to recoup the big commissions. The future performance of your investments is diminished dollar for dollar for these excessive fees.
In the 1980s and 1990s, when economic growth and higher inflation pushed equity returns into annual double digit returns, high fees might have been overlooked. But, when today’s lower growth and inflation produce lower returns, a 1% annual difference in fees, for example, makes a huge difference. Fortunately, astute investors have been moving away from high-cost, conflicted advice and toward low-cost investment advice and total wealth management where the adviser acts in their best interests. Members of National Association of Personal Financial Advisors (NAPFA), such as DWM, have seen major upticks in business and are helping more and more families reach their financial goals. NAPFA is the country’s leading professional organization of Fee-Only financial advisors. Its members sign the NAPFA Fiduciary Oath legally requiring all of us to always put your interests first and disclose any potential conflicts of interest. See the oath: http://www.napfa.org/consumer/NAPFAFiduciaryOath.asp
Not surprisingly, the big banks and brokerages have tried to limit their continuing losses of business by trying to confuse the issue. Most have set up a part of their business as “fee-only” and describe their total offering as “fee-based.” Caveat emptor– “fee based” means the big banks and brokers charge you a fee to begin with and then get commissions on top of that for products they can sell you.
Last summer, the Department of Labor (“DOL”), which is responsible for safeguarding employees, issued a ruling that as of April 1, 2017 all investment professionals who work with retirement plans or provide retirement planning advice would be legally bound to act as fiduciaries, putting the clients’ interests first. This rule would impact trillions of employee retirement dollars and likely save participants billions annually in fees. As expected, Wall Street and the related lobbyists have attacked the ruling. Their complaint is threefold: 1) it would limit choices to participants (yes, it would reduce many of the toxic overpriced funds currently used), 2) trigger dislocations in the retirement services industry (yes, like modifying the behavior of the bad guys or eliminating them), and 3) causing increased costs for consumers (no, it wouldn’t- this is simply an “alternative fact.”). Last week, as expected, President Trump issued a presidential memorandum to direct the Labor secretary to begin a new rulemaking process to modify the DOL rule. Of course, NAPFA, the Financial Planning Association (FPA) and the CFP Board all applaud the new rule and are working diligently to put it in place, keep it there and expand it. We do too.
We support sensible regulation to protect consumers in the area of financial advice and the requirement of fiduciary responsibility to be in place for all investments. It is estimated that the shifting of $5 trillion of investments from high-cost, ineffective products to low-cost products could save consumers $50 billion per year, transferring those excess commissions and fees from Wall Street, big banks and brokers to your pocket.
Here’s the best part: Neither Washington nor Wall Street can stop the movement. The DOL fiduciary rule is not shaping investor behavior, it is simply catching up with it. Vanguard, the industry leader in low-cost indexing, had $1 trillion in assets before the financial crisis, now it has $4 trillion. Total Wealth Management firms like DWM, which provide both independent investment advisory services and value-added financial services on a fee-only, fiduciary basis, are working with more and more families.
Consumers know what’s best for them- fee-only fiduciaries who put their interests first. They are voting with their feet and their money away from the old toxic models of the big banks and brokers. The F-Word (Fiduciary) is becoming the antidote to the sale of commissioned financial products.