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Financial Duty - Trust and Verify

A key quality we have encouraged investors to seek in the wild world of investing is an advisor who will accept (in writing) a fiduciary relationship with his or her clients. “Fiduciary” is a fancy term that legally obligates the advisor to always act in his or her clients’ highest financial interests. To us, that should be a given for good investment advice; otherwise, how do you know that it’s good for you and your unique circumstances? But while it’s a given, it’s not necessarily enough.

The financial media was set abuzz recently when former Goldman Sachs executive director and derivatives guru Greg Smith wrote a scathing New York Times op-ed condemnation of his firm’s activities in the absence of a fiduciary obligation to its clients. He decried what he perceived as a shift in corporate culture and leadership, and increased pressure to place the firm’s interests ahead of its clients. “To put the problem in the simplest terms,” he said, “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.” And this was among his tamer statements.

Published on the day of his resignation, Smith’s article set off a firestorm of commentary among the financial press. An important question that came to my mind was this: Would fiduciary obligation alone have prevented the chilling climate change that Smith felt during his 12-year career?

As much as I’d love to think that laws should be sufficient to protect an investor’s interests, household names like Bernie Madoff, MF Global and Allen Stanford tell us that sometimes they’re just not. Fiduciary duty is an essential first requirement in considering an advisor relationship. But it’s not enough.

While I can’t offer an iron-clad solution for weeding out every wolf that may be hiding in fiduciary clothing, I can suggest a few additional steps to your due diligence:

Learn — read some good books by those who champion investor interests, such as The Investment Answer by Dan Goldie and the late Gordon Murray, as reviewed in my past blog.

Question — If an investment “opportunity” seems too good to be true, or it’s too complicated to understand, keep asking questions until all is clear … or pass. A perennial way to hide ulterior motives is to bury them in the fine print.

Verify — Make sure your asset’s custodian is independent of your advisor (as was NOT the case with Madoff), with independent reports. And don’t just toss those separate reports into your circular file. Make sure they match up with the information you’re receiving from your advisor.

Combining these kinds of common sense, personal acts of vigilance with a fiduciary level of advisor care is like locking the doors of your home while also installing a formal security system. You can’t eliminate all threats to your financial well-being, but you can certainly encourage them to go elsewhere.