Recently the Department of Labor released new rules regarding how financial advisors should treat clients. This “Fiduciary Rule” is an attempt to require more advisors, namely brokers, to act in their clients’ best interests, like fiduciaries. Will is going to write more in detail on this topic, but I wanted to offer our opinion on at least one part of this recent discussion.
It does matter how your advisor gets paid.
I attended a social security seminar a couple of weeks ago, and I got a few new ideas, tips and tricks. These things are generally led by folks looking to drum up business –and there is no harm in that. This particular individual was quite knowledgeable on Social Security. But her ultimate angle was selling insurance and commission products to clients. Also fine, and perfectly legal.
Naturally, a participant asked about choosing an advisor to help with these decisions, and this person felt compelled to state several times “it does not matter how your adviser get paid, not one bit”.
I found that offensive, misleading and, frankly wrong.
We think it makes a pretty big difference that we only earn a fee on the assets we manage. This means if our clients’ assets decline, so too do our revenues, and we will earn less money. Period. But more importantly, it matters whether your advisor is compensated to sell you insurance products, receives commissions or fees from the investment products they sell, and that all of these are clearly disclosed to you, the client. I emphasize clearly because, even if you haven’t glazed over already, an explanation of 12b-1 fees, front loads, back end loads, and the fees on variable annuities will likely test the patience of the most curious client.
If our firm used several solutions from fund company ABC in your portfolio, might you want to know if the company also hosted us in the Caribbean for a weekend? How about if we suggested a life insurance policy that we also sold you, and collected 2,3,4% of your money in commission? Would it matter if you asked how we built the portfolio and we neglected to mention that certain of the investments paid our firm 1% annually, just as a ‘trailer’?
Is there any way in these examples where our advice or actions could be construed as completely objective? We believe the answer is no. We believe that clients deserve to know, in plain language, clearly displayed and patiently explained, exactly how their advisors are paid. To be honest, it is harder to make a living at 1% on assets under management. It is easier to orient one’s worldview around the idea that all clients need loads of annuity, whole life, liability, disability insurance and then collect commissions on the sales of that insurance. That is an easier way to make dollars.
It is easier to accept mutual fund fees on the front end, the back-end, or as ongoing trailers and know that the business of advice rests on trust. Clients rightfully assume their advisor must have done a good job selecting among the tens of thousands of solutions that exist, right? Well, maybe.
But if your advisor lives and dies by a sword of their own casting, invests in the same portfolio, at the same fees, as you, and must trust that their service, efforts, communication and process will be enough to justify their management fee, there is a simple transparency in that model. It is not for everyone. But we have been around the block: brokerage firms, investment banks, inside massive asset management companies, insurance companies, and the like. We know how the deal gets cut, the boss gets paid, and where the chips fall.
Saving for the financial future is hard, intimidating and often times daunting. We know; we are doing so ourselves with young kids, families, aging parents, charitable intent, hobbies, dreams and fears of our own.
When you sit down with you advisor, your doctor, your trusted partner, you should know how they are getting paid. Their advice was hard won, through years of study, hard work, failures and effort. As do all professionals, advisors deserve to be compensated. And as clients who trust your future to their advice, you deserve to know where the conflicts and alignments of interest lie.