For years, Washington has been mired in a controversy over whether all financial advisors should be held to what’s known as a fiduciary duty in their dealings with investors. Frankly, it is hard to see what could possibly be controversial about insisting that those who guide you in financial affairs should be held to the highest standard of duty and care.
Some skeptics do not even think it matters. Others insist that such duty is meaningless. “When interests diverge, doesn’t everyone do what is best for himself regardless of the effect on his clients?” some ask. I strongly disagree. The next time you sit in the doctor’s exam room, covered only by a flimsy paper gown, consider the importance of his duties to you. What would happen if the doctor did what was best for him rather than focusing solely on your best interests?
Financial well-being runs a close second to health. The success of your savings and investments may spell the difference between comfort and misery in old age. Yet, under existing regulations, designed primarily to reign in the excesses of “financial salespeople,” financial advisors are only limited by the requirement not to suggest investments that are “unsuitable” for their clients. Why isn’t that “suitability standard” sufficient? For one thing: costs. Someone who can sell you anything “suitable” will surely choose the solution that makes him or her the most money. A fiduciary, however, is held to a significantly higher standard: He must pursue what is best for you. That means he must not substitute something less good for you but better for him.
How much is at stake when financial intermediaries put a little more into their pockets? Many years ago, a friend challenged me. “Maybe the difference isn’t all that much,” she suggested. I put one of my brightest young Wharton students on the case. Find out, I instructed him, how much it costs folks when a financial guy charges 2 percent more than he should. Ever on the ball, the young scholar said he needed to know the compounding rate (the amount the investment would grow on average each year). I asked him to do the complex calculation for a portfolio that would grow 7 percent per year. What his math revealed was eye opening. If an investor started with $100,000, an extra 2 percent of costs would be $2,000 after one year. That’s real money of course. But it is the compounding that creates the shocker. After 30 years, an extra 2 percent in fees would result in the investor’s portfolio being smaller by $431,916.57.
So you see, it is worth a fortune to work with someone both skilled and also committed to truly putting your interests first. You want a practitioner who acknowledges this high level of duty, understands it, and embraces it as part of professional practice. In turn, you should avoid working with anyone who is trying to make the very last dollar possible from you.
How can you find a true fiduciary to work with, as opposed to someone who is just mouthing that word? Simply ask. Anyone who offers you financial services should be able to tell you that they have and honor a fiduciary duty to you. They should be willing to tell you exactly how they make their money. Now comes the most important part. They should be willing to put all that in writing. Ask them to send you a letter on official stationery stating all of the above. That letter should state specifically that the signer acknowledges a fiduciary duty to you “as that term is traditionally understood in the law.”
If you receive such a letter, you have probably found a fiduciary to guide and advise you. If not, you have probably learned a whole lot about the person you were interviewing for the job.
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