Broker Check

What is this fuss about a ‘Fiduciary’ ?

June 08, 2017
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In case you haven’t noticed, there is a lot of talk among financial circles about fiduciaries and ‘fiduciary standards’ and some new regulation or other.

What’s it all about?  

Well, Virginia, it seems some Washington lawyers suddenly discovered their stock brokers and investment salesmen might have been touting their company inventory rather than the best available selections.  In fact, that inventory might even have paid a higher commission than a better, ‘more suitable’ annuity or mutual fund.

If you find this shocking and surprising, you are the person for whom this new legislation was enacted.  That may not mean you are a rube or a babe in the woods, but it might come close.

We all want to think the other guy is as honest as we are.  At least that is the way I was brought up.  However, now that I am older, wiser, and no longer a sap, the urge to once again follow the footsteps of Carrie Nation has a certain appeal. Not that fraud and double dealing were ever legal.  No; but they have been, to a large extent, tolerated and even institutionalized. (Your monthly pension or broker’s statement is weighted by unread, opaque platitudinous caveats “for your protection.”)

Big Uncle, through the auspices of the Department of Labor (?!), has ordered investment sales organizations (your local Financial Advisor, your broker, your bank, your retirement plan adviser) to act as fiduciaries.  Worse still, the DOL had to define it for them.

What is it? 

Simply:  provide the best deal for your client that you can find. 

What’s so hard about that?

These “retirement plan advisers” are so used to playing with a stacked deck, they just do not know how to deal off the top.  They, mostly the bigger players, are so used to loading their plans with unnecessary fees, charges, and high-commission elements, they lost sight of the Golden Rule. They substituted “He who has the Gold, rules.”

Will the new rules make a difference?

They might.  Remember Prohibition?  No, you’re too young to recall that the Volstead Act created speakeasies and violent crime. 

Will that recur?

No. Of course not. But if people need to have morality legislated; if you have to teach the honest broker what honesty is; if scouring the market to help your client is superseded by dumping annuities/stocks/bonds to grab commissions; then our system has failed and has done so spectacularly.

Is that the Way of The World?

I hope not.  When I first entered financial services, I had to learn a whole new language of numbers such as ratios and comparative values.  There was no talk of morals and, unlike what was offered at the large wire houses like Merrill Lynch, no formal training classes.  Simply watch and learn.

However, when I walked into that role, I brought my own morals with me. I remember objecting to one salesman’s habit of calling a buyer (we sold municipal bonds to banks), voicing the offering, restating the buyer’s normal delivery instructions and then, assuming consent, hanging up on him.  If the bank President or VP did not call back in 10 minutes, he had a sale!  I was appalled! And a little impressed. In two-plus years, I recall only one call-back: The banker wanted the bonds put into his personal portfolio. 

When I left trading for insurance, as a ‘captive’ agent, I learned from day one that my job was to find the very best products –whether ours or someone else’s—to meet my obligation to my client.  As “Business and Estate Planning Specialists” we were expected always to sit on the same side of the table as our business-owner clients when surveying and weighing their options.  When they saw this in action, they recognized our sincerity and a long-term, trusted relationship followed. 

It is a shame that the fiduciary model is not automatic.  But manufacturers and brokers of investment products, whether new issues of stock, hot bonds or annuities, hire and pay salesmen to push their wares, not ‘the best’ available. The firm, knowing that a product will be hard to sell, will add extra commission so the representative will work harder to make more on the sale.  Of course, the buyer, J.Q. Public, is unaware.

The financial services industry has failed to live up to its hype as investment professionals who care about their clients’ future.  Instead, the public’s awareness of deceptive fee structures inherent in mutual funds and institutional retirement plans (especially 401ks and other qualified plans) has led to distrust. Sy Syms of Syms discount clothing outlets used to say, “An educated consumer is our best customer.” If you cannot trust the investment professionals, who will make you an educated consumer? Bernie Madoff? Disappointment and enlightenment has led to this: Legislated Morality. 

Whether it will truly work, I do not know. We cannot all be objective.  Also, being objective does not mean we are right.  In this new world of diminished reliance on personal ethics, maybe dictated standards are needed. The new model is still unclear to me.  Watch and learn.  Meanwhile, hold on to your wallet.