You may have a close friend or even a family member who formally or informally gives you financial advice. You feel comfortable taking this person’s advice because they seem more knowledgeable than you and they are “such a nice person.” Who can blame you for trusting this adviser?
You’re not alone. Most investors are confident that their adviser is working on their behalf. According to a recent survey by Financial Engines, a portfolio management company, slightly more than half of American investors believe that their financial advisers are required to act in their in their best interests or as a fiduciary, even though financial adviser is an undefined and wholly unregulated term.
The word “fiduciary” was one that few had heard until the past two years when the U.S. Department of Labor started working on a regulation that would require anyone who provides advice on retirement investments to act as a fiduciary, which means putting your client’s needs ahead of your own. Most financial advisers are not required to act in your best interests; they are merely required to offer customers a product that is “suitable.” That means it can’t be bad for you, but it doesn’t have to be the best.
Here’s a simple example: Imagine two mutual funds with identical portfolios. Both funds are suitable for your particular situation. Fund A charges a 5.75 percent commission (paid to the broker) and a 1.25 percent annual expense ratio (a portion of which is paid to the broker annually). Fund B charges no commission – 100 percent of your money gets invested – and only charges 0.25 percent per year (a true no-load fund).
A fiduciary adviser would have a legal obligation to at least present both funds to you. The “suitability” adviser could sell you the more expensive product and not even verbally disclose the high expenses. (This person must hand you a prospectus, which you are unlikely to read.) Which type of adviser would you rather have?
As it is now, most people providing financial advice are not always required to do what’s best for you and your financial future. Is it any wonder that most equity fund investors make less money than they would if they purchased the Standard & Poor’s 500 Index?
While 90 percent of financial advisers may not be required to act as your fiduciary, 93 percent of investors surveyed by Financial Engines believe that everyone who provides financial advice should be required by law to act in your best interests. Yet most of the financial services industry is opposed to the Labor Department’s new fiduciary rule, and its implementation was delayed by the Trump administration.
Your relationship with your financial adviser should not be based on friendship or blind trust. Your future depends on the financial decisions you make today. Working with a fiduciary investment adviser does not guarantee financial success, but it does improve your chances. No matter who is advising, you must ask them if they always act as a fiduciary and then, no matter what they say, get it in writing.
The host of the nationally syndicated Don McDonald Show for over 20 years, Don now co-hosts Talking Real Money with Tom Cock on Seattle’s KOMO radio Saturdays at noon (talkingrealmoney.com). Don also publishes the investing magazine, real investing journal (realinvestingjournal.com).