The fiduciary rule is partially in place as of June 9th. The most important thing this rule has done for the investing world is it has woken the public up to how important it is to work with a fiduciary adviser.
What does being a fiduciary even mean? Well it means that you have to act in the best interest of the client. But what does that even mean?
The difficult part is that it can mean very different things for everyone. This post will cover some key aspects that should be a part of every fiduciary relationship.
1. Honest communication between adviser and client about:
- Goals
The adviser needs to know what the money is for. It’s impossible for an adviser to act in the best interest of the client without this knowledge. The adviser may think they are acting in the best interest of the client but without the client communicating their goals the adviser will simply be guessing. This is a two-way street. It’s on the clients to tell their adviser what the goal is. It’s also on the adviser to ask and understand to the best of his/her ability what the client’s goals are. If the client doesn’t have any goals then the adviser should help the client set some reasonable short, intermediate and long term financial goals. - Compensation
Understanding how your adviser gets paid is absolutely imperative. All fiduciary advisers should be up-front and open about their fees. If they’re not, that’s a serious red flag. An adviser that is unwilling or unable to explain his/her fee structure to their client’s is not an adviser that should be trusted. - Process
A financial adviser should be able to explain their investment/financial planning process so all of their clients can easily understand it. If they can’t, their process is most likely too complicated. Keeping things simple and cheap works when it comes to investing. - Costs
Every investment has some sort of cost associated with it. Clients should know how much it’s costing them to own their investments. It’s on the advisers to let them know.
2. Always doing the right thing for the client no matter what.
- Sometimes fiduciary advisers are going to have to recommend a client do something that hurts their firm. This is the very essence of what being a fiduciary is all about. For example let’s say a client really needs to pay off a large debt he/she has. Their options are to either take out money from their investment account with their adviser or open up a new credit card. Since taking on new debt just to pay off old debt is a not really getting rid of the problem, the adviser should recommend the client takes the money out of their investment account. This option would hurt the firm since the assets would no longer be under the adviser’s control. However, it would be beneficial to the client because they would be clearing some debt off their plate. A fiduciary should always put the client’s interests ahead of their own, plain and simple.
3. Limited conflicts of interest.
- Advisers that charge an assets under management (AUM) fee or a retainer fee inherently have less conflicts than advisers paid on commission or by a wrap fee. The real conflicts of interest are seen when “financial advisers” are incentivized to sell their firms investment products. These “advisers” get paid extra to put their clients into their firms products. Naturally these “advisers” will put their clients into the investments that pay them the most, not the investments that are in the client’s best interest. It’s just like Warren Buffet said “never ask a barber if you need a haircut”. Never ask a “financial adviser” or stock broker (who gets paid to put you into products) for financial advice. Instead look for a fee-only adviser. There will never be a conflict free relationship, but minimizing conflicts of interest is a crucial aspect of being a fiduciary adviser.
Now that the Department of Labor’s fiduciary rule is partially in effect, I’m hopeful for the future of retirement savers. I’m slightly skeptical about how much the rule will actually be enforced. But like I said the most important thing this rule has done is it has woken investors up. It has woken them up to the fact that inexpensive, less-conflicted, honest financial advice is out there. Now the investors just have to find it. When looking for an adviser make sure he/she covers the three aspects covered above as these should be a part of every adviser-client relationship. Especially if that adviser holds them-self out as a fiduciary.