Have An Investment Advisor? Make Them Sign This Fiduciary Pledge

The SEC has officially recommended that anyone that provides personalized investment advice to retail consumers should be subject to a fiduciary standard of conduct. Put simply, this means that anyone under the “financial adviser/money manager” umbrella has to be legally required to put your interests ahead of their own. Currently, many people providing advice are simply salespeople with fancy titles. As you might expect, big Wall Street firms are pouring millions toward lobbying efforts to stop it.

Tara Siegel Bernard of the NY Times writes in her Will You Be My Fiduciary? blog post about one CFP who’s started circulating his own Fiduciary Pledge. The idea is to get your investment planner/portfolio manager to sign it. Sounds like a good test to me.

The Fiduciary Pledge

I, the undersigned, pledge to exercise my best efforts to always act in good faith and in the best interests of my client, _______, and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interest, which could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all fees I will receive as a result of this transaction and I will disclose any and all fees I pay to others for referring this client transaction to me. This pledge covers all services provided.

X________________________________

Date______________________________

Ron A. Rhoades writes an RIABiz article outlining how applying the SEC recommendation could alter the financial landscape for clients, leading to reduced fees for individual investors (and thus higher returns and bigger nest eggs) and more difficult justifications for creating “sh***y investments”.

Because fiduciary advisors operate under a fiduciary standard of due care, and because fees and costs of investment products do matter, closer scrutiny of the “total fees and costs” of pooled investment vehicles and other financial products would occur. As a result, portfolio turnover within funds would decline dramatically, and even greater pressure would be brought to bear on other aspects of the fees and costs of pooled investment vehicles. However, true fiduciaries would not have to choose the lowest cost product; rather, they would justify, as part of their due diligence process, why each fee and cost was worthwhile for the investor client to incur.

Not everyone wants to manage their own investments. But if you are paying someone for help, I would agree that they should be a fiduciary at a bare minimum.

Comments

  1. I got a better idea. Force them to buy into the advice they give you with their own money. Or, force them to disclose their own personal portfolio to you to compare.

  2. Not a bad idea, probably as good as the fiduciary minimum. Although I bet lots of advisors eat their own cooking, because really they have to. I bet most Kia car salesmen drive Kias, even if that wasn’t their first choice. (Kias are actually pretty good now, I’m just giving an example.) Since they get to keep the commission themselves, it doesn’t affect their long-term returns as much on many products.

  3. This is awesome news. Not that I expect much progress but perhaps this will stir the pot a little bit and cause some people to be educated.

    I used to have an investment advisor; only for a couple of years. In the last exchange i was pestering him about fees and such and he blurted out (in apparent frustration) “well, I think you should just go to Vanguard and I can help you with that”. I said…well…actually I can just do that myself. That was the Last time I talked with him.

    My next problem is that I still need investment advice…and it is hard to come by impartial advice. I even used Vanguard’s service but I didn’t totally trust that service either.

  4. I have a novel idea – why not tie their fee to the performance of your investments. Meaning, if they advise you properly and your investments make money, then they get a small percentage. If you loose money, they get nothing.

  5. Now after reading this I am thinking to work with an Finacial Advisor(no comission based). May be its good idea to tell who is your Financial Advisor,and do you recommend him, if so why. A Financial Advisor with more clients is motivated to work better.

  6. Before jumping on the bandwagon, how many people know that investment advisors owe fiduciary duties to their clients (i.e. pension funds, endowments and other institutional clients)? How well did these institutions fare compared to individual investors? Adopting an additional legal framework will not protect stupid people from making stupid decisions with their money except cost more in compliance costs.

  7. Jonathan, just to clarify my earlier post: I believe the focus of this post is on financial advisers. Investment advisors are a term of art, they usually deal with institutional clients and are subject to regulation by the Investment Company Act of 1940 (as amended). Individuals work with financial advisors (another term of art) who are subject to a different regulatory regime. So when the title of the post asks: Have an Investment Advisor?, it should actually read: Have a Financial Advisor? Really appreciate the great commentary though.

  8. Just Saying says:

    How about trying a portfolio management program that charges a fixed fee. That would eliminate almost all ofthe conflicts of interest and the do act as as a fiduciary. Maybe look at Flat Fee Portfolios as a start.

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