Why Investors Need Advisers Who Are Fiduciaries
Pity the average investor looking for the answer to the question we all face: "Will I have enough?" With millions of baby boomers now facing the challenge of retirement and the desire to maintain a hoped-for lifestyle, the search for a competent adviser who will put the interest of the investor first is not one that can be easily undertaken.
Over my decades in the industry, it has become abundantly clear that most individual investors are clueless about how to go about finding a proper adviser. Although the major brokerage houses and insurance companies will happily sweet talk you with offerings that are best positioned to improve their own bottom lines, the odds of finding the right person are not good.
In the absence of a fiduciary requirement, all that is required of the nonfiduciary financial adviser is that the product or service being offered is suitable. And, no surprise, the definition of suitability is so broad that almost anything other than the Brooklyn Bridge might be appropriate. Add a slick presentation, a big smile, and lavish offices and you have a package that has all the hallmarks of something worthy. Which is why many investors end up paying more and getting less than they should.
Not only that, but there is an alphabet soup range of designations for financial advisers. Most are rubbish. Indeed, some are available for low-cost purchase online by almost anyone. So when you see a long list of letters after someone's name, think of Campbell's Soup. The two that are most meaningful are CFP (Certified Financial Planner) and CFA (Charter Financial Analyst). The rest are usually either insurance salesmen or traders in snake oil.
All of this is shocking since we all know that M.D. means doctor of medicine. So why not have a designation like FID for financial advisers who are fiduciaries? Wouldn't that make it easier and reduce the abuse?
Abuse by advisers has continued for years. The best of times for stockbrokers was before that dark day in 1975, when commissions on stock trades began to be discounted. Before that, commissions on individual trades often ran $100 or more. Fast forward to today, when commissions are typically free or extremely low cost, regardless of how many shares are being traded, and you begin to get the picture.
But there's more. Think about mutual funds. When mutual funds first came on the scene, there were hefty sales charges or "loads" attached. In those days, the loads ran as high as 8%. As time passed, some came down to 5% while others had no sales charges. These days, funds with no sales charges, a.k.a. “no loads”, are the rule, not the exception.
Think about whole life insurance. That's the one where you keep paying premiums, build up cash value, and provide protection for your family. What could be better? The answer: term insurance, which is considerably less expensive. Why? Because when you buy whole life, a hefty chunk of the premium goes to the salesperson as a thank you for his efforts. What's more, the buildup in cash value over time is usually less than what you could have expected in a properly created and monitored investment account.
How to protect your loved ones? Get a level term insurance policy to cover specific risks, such as college tuition and mortgage payments.
All of this gets back to the fiduciary issue. The challenge facing investors seeking guidance is difficult enough. And in all cases they need to find out exactly who they are dealing with: someone who's on their side of the table or someone who's looking for another easy mark.
A stockbroker is someone who invests your money until it's all gone.
N. Russell Wayne, CFP®
Any questions? Please contact me at firstname.lastname@example.org