Who's the Fiduciary: The Butcher or The Nutritionist?
Opened the Saturday paper in search of good blog material and Ron Lieber of NY Times comes through again in his latest column “Pepper a Financial Adviser with Questions About Fees.” Fiduciary is a word being tossed around lots these days when it comes to the relationship between a financial advisor and their clients. It might surprise a lot of people that in the current regulatory environment, a financial advisor is NOT required to act in their clients’ best interest (hmmm…surprised?). This fiduciary standard (to act in best interests of your client) was about to be applied to advisors providing retirement investment advice but the new Administration appears keen on delaying this, according to CNBC.
In the absence of regulation, investors better be educated about the reasons that financial advisors might not act in their best interest. Lieber provides a lengthy checklist of questions to ask your advisor to suss out these potential conflicts of interest. Here’s a sampling of the questions to ask:
How much money will you personally make in cash commission, now, if I select this product? And how much will you make later, in any sort of ongoing or trailing commission?
Is there a bonus you are eligible for that comes as a result of your recruitment to this firm? Is it in jeopardy if you don’t make this sale?
Are you earning more from selling me this product than you might from putting me in a similar product from a different company? Are you earning more than you might if you put me in a different vehicle from the same company?
Is your company or the company that created this product running any contests that might lead to you getting to take a free trip if I buy this product? (For a fun virtual tour of the places your salesperson might go, see the two reports that Senator Elizabeth Warren has put out in the last couple of years.)
Here’s a great way (from Ron’s column) to describe this concept in a way that anyone can grasp by comparing butchers and nutritionists:
- The video describes the goals of butchers and nutritionists. How do they differ?
- Who are the butchers of the investment world? The nutritionists?
- Is a butcher comfortable selling you a cut of beef that might not be the best thing for you? Why?
- There are millions of people who rely on financial advisors for investment advice? Since most of them are not fiduciaries, why do you think that people use them?
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.