Fiduciary: A Funny Word with Serious Meaning
Finance is often such serious business – after all, we're talking about people's life's savings –we advisors may sometimes get caught up in our own gobbledygook language and forget that the rest of the world doesn't know what we're talking about.
Take the word "fiduciary." The term has been grabbing a lot of financial headlines lately, as the April launch of the Department of Labor's Fiduciary Rule approaches but the political winds have left its future far less certain.
Have you been wondering what all the excitement is about? Today, I'd like to share some translation, along with some light-hearted takes on fiduciary advice.
Don't get me wrong. I'm still dead serious when I suggest that the only financial advice worth heeding should be fiduciary – always and only meant to serve your highest financial interests. If your financial advisor won't commit to that standard of duty, in writing, I'd take that as a sign to seek different advice.
But there's no reason understanding what fiduciary is about has to be as complicated as some might suggest.
What is a fiduciary advisor?
Fortunately, I've covered this one before … several times. Most recently, I published "Fiduciary Musings" in spring 2016, just after the DOL passed its Fiduciary Rule governing people's retirement money.
As I said then: "Anyone offering you advice about your retirement assets [or any of your money, really] should be doing so with your best interests in mind." At its essence, that's all fiduciary means. If you didn't get a chance to watch "Tony Robbins explains 'fiduciary' to Main Street" last spring, you're still in for a treat – and some great insights – by watching it today.
What about those who say it doesn't matter?
If you've been watching the coverage on the DOL's Fiduciary Rule, you may have run across those proposing that investors are better served by the status quo. They argue that universal fiduciary standards are, at best, unnecessary and, at worst, will harm "the little guy."
I find it curious that those most loudly defending a do-nothing approach are almost always the same financial insiders who have the most to lose from the transition. Fortunately, their arguments pale in the clear logic coming from one of the granddaddies of "little guy" champions, Vanguard founder John Bogle. Check out how much sense he made taunting fiduciary critics in his recent New York Times Op-Ed, "Putting Clients Second":
The now-endangered fiduciary rule is based on a simple — and seemingly unarguable — principle: that in giving advice to clients with retirement funds, stockbrokers, registered investment advisers and insurance agents must act in the best interests of their clients. Honestly, it seems counterproductive to go to war against such a fundamental principle. It simply doesn't seem like a good business practice for Wall Street to tell its client-investors, 'We put your interests second, after our firm's, but it's close.'
John Bogle, New York Times
You have my permission to make fun of anyone who tries to make it more complicated than that.
Why should you care, anyway?
Maybe you're with me so far, but thinking something like: "Why is financial advice different from any other advice?" As successfully spoofed here, what if your barista, your hair stylist and computer sales staff were held to the highest standards in their advice? Here's an excerpt:
BARISTA: No need to resort to violence, sir. Here's what I recommend as your fiduciary: Order an iced doppio that's the same two shots of espresso as in your usual grande iced latte, and then go over there and fill the cup with the milk we offer our customers for free. You'll pay $2.25 instead of your usual $4.50. And here's the thing: It's actually the same exact drink.
CUSTOMER: So you've been ripping me off for years?
BARISTA: Basically.
Jeremy Olshan, MarketWatch
The analogy is amusing, but the point is important. It gets at some of the essential differences between a financial advisor and, say, your neighborhood purveyor of coffee and tea.
To start with, the pricing in a coffee shop is pretty transparent. You already know you're paying a premium. Plus, you know what you want; your barista's suggestions are opinions, not advice. Besides, it's only coffee (or tea). If you get a bad cup, you'll order something different next time.
In contrast, when you turn to someone like a lawyer, physician or financial advisor, there's an inherent and significant dilemma: You're asking for our advice because we're experts who are supposed to know a lot more than you do about our profession. But, because we're experts, you're in a vulnerable position. An advisor could give you bum advice and you wouldn't know it until it's too late – damage done. Moreover, the damage can be huge, expensive and life-altering.
This is why anyone selling you financial products or financial advice should be held to a higher standard. It may be okay if a barista's focus is on hearing the tip jar jingle, but a financial advisor has a much higher obligation to take good care of you and your well-being. That higher duty should be accompanied by a higher standard – the fiduciary standard – and no less.