The best part about only managing your own money is that you’re incentivized to always do the right thing because it’s your own money. My goal is to maximize wealth within the context of a risk management framework. I don’t have a boss that’s constantly pushing me to gather new assets or maximize revenue. So the debate on the fiduciary standard doesn’t really affect me.
But it doesn’t mean I don’t have an opinion.
Fifth Circuit v Fiduciary Rule
The Fifth Circuit recently ruled against the DOL. It is now widely assumed that the SEC’s proposed rules will replace the DOL’s fiduciary rule. The SEC rules require brokers to look out for clients’ best interest but it stops short of imposing a fiduciary standard on brokers. The end result is that brokers can keep their kickbacks as long as they disclose them to clients.
Ask yourself how small the print will be when the brokers “disclose” those kickbacks to their clients.
A More Perfect World
In a perfect world, every financial advisor would already be providing each and every one of their clients the lowest cost, most effective financial products that align perfectly with their goals.
This doesn’t happen in the real world.
The easiest way to improve outcomes in the real world is to ask your financial advisor how he gets paid for each product he has you invested in. If you have an honest advisor he’ll show you the percentage you’re paying for the ongoing management fee of the mutual fund, the fee you paid to get into the mutual fund in the first place (although it’s crazy to pay an upfront fee to buy a mutual fund in this day and age – if you’re paying upfront mutual fund fees you probably have an advisor who isn’t looking out for your best interests), and whatever account wrapper fee he charges on top of all of this for his “advice”. You’ll likely get this number in percentage form. Do yourself a favor and convert it to dollars. Ask him who else is paying him so you can figure out if you’re actually the client or the product being sold.
Then think hard as to whether the advice you’re getting is worth that sum. You might decide your advisor is worth it, but it’s easier to understand the true cost when it’s in dollar form because you can more easily compare that number to a list of alternatives. Like a vacation, a bass boat, or a wine cellar.
A less than honest or incompetent advisor will give you incomplete numbers, or even worse, not be able to give you the numbers because he has you in a bunch of annuity products whose fees are opaque as a pint of Guinness.
If you don’t have a family office looking out for you, show your financial statements to a financial advisor from Vanguard, Fidelity, or an honest-to-God fiduciary RIA like RWM. They’ll be able to quickly tell you how much you’re paying in fees, mostly becuase they use it as a selling point to win new business.
Don’t get me wrong – the lowest cost option isn’t necessarily the best choice. The true value of financial advisors for most people is to keep them from doing dumb stuff when they’re panicking in a bear market. But there are a lot of good financial advisors that combine good advice with reasonably low costs.
My solution for financial advisors to meet the fiduciary standard is to make every financial management firm present you a quarterly or monthly invoice for every fee they charge. This invoice must be paid by a check you write to them. Don’t allow them to automatically deduct a tiny percentage from your account every day, which is their current practice, and is so small that you don’t notice it but whose effect over decades totals hundreds of thousands if not millions of dollars.
You know how much your mortgage costs you every month. Why shouldn’t it be just as easy to know the total cost of asset management every month? And if you’re wondering why Vanguard, Fidelity, and Blackrock dominate the asset management business: they’re not screwing their customers with high fees.