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.
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.