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In financial advising, the magic “F” word is “fiduciary.” If your advisor doesn’t use this word,  watch your back.

“Dr. Smith, a mid-career EP, hired Frank, a financial advisor at a large brokerage firm, to handle his investments. Frank invested Dr. Smith’s portfolio into 20+ mutual funds, variable annuities, and other products and periodically sold off old funds and added new ones. Dr. Smith was initially impressed with the level of sophistication he was getting.

A few years pass. The market did well and Dr. Smith felt comfortable with Frank since Frank is a nice guy and was proactive with his investments – switching things around and changing funds when he could find better opportunities.

Then came 2008. The financial crisis hit. Markets around the world tanked. Dr. Smith saw his portfolio crumble. He repeatedly called Frank, whose response every time was to switch to different money managers that his team had researched and that could do well in bad times. Upon learning of the falling real estate market, Dr. Smith asked Frank to get him out of the real estate holding he had invested in. Unfortunately, the real estate holding wasn’t liquid and the holding company halted share redemptions.
At this point Dr. Smith looked at his investment portfolio more closely and realized he didn’t truly understand what he was invested in or why. He also didn’t understand why Frank chose the mutual funds he did.

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Physicians act in the best interest of patients. That makes every physician a fiduciary to every patient. Unfortunately, fiduciary is an “F” word the vast majority of financial advisors simply can’t say. In fact, most advisors do not have a legal obligation to act as fiduciaries.

A financial advisor who is a fiduciary abides by the following principles:

  • Provides undivided loyalty to you
  • Acts in utmost good faith and candor to you
  • Fully discloses how he is paid
  • Fully discloses conflicts of interest
  • Acts in your best interest even if that is in conflict with the advisor’s interest
  • Abides by a Code of Ethics


Think about what that means. If an advisor is not a fiduciary, it means that the advisor:

  • Is not loyal only to you
  • Does not fully tell you how he’s paid
  • Does not tell you of conflicts of interest
  • Does not act in your best interest


Why would you ever hire a financial advisor who is not a fiduciary? You get one chance at retirement. Does it make any sense to have a financial advisor whose loyalty is to the products he sells you and his employer and not to you? Patients don’t want doctors like that and you shouldn’t hire a financial advisor like that. Ever.

Brokers vs. Advisors
One thing that confuses the conversation is the term “financial advisor.” As I wrote in a previous article, that term could mean anything from an insurance agent to an investment advisor. But when it comes to being a fiduciary, there is a fine line.

Advisors who work at banks and brokerage firms are not held to a fiduciary standard –and it’s legal! They are called “registered representatives” or more commonly stockbrokers and are held to a “suitability” standard. The suitability standard is a vaguely defined term that simply means that the investments recommended to you are merely “suitable.” For example, if there were a “suitability” standard in emergency medicine and you saw a patient with chest pain, it might dictate that you order some labs on the patient. A fiduciary standard, on the other hand, would say that you should order cardiac enzymes, an EKG, consult a cardiologist – essentially act in the best interests of the patient – and think about the alternatives and pros/cons of each decision.

Applied to investing, a suitability standard means that a stockbroker/financial advisor/registered rep can sell you a bond, stock, or mutual fund but does not have to consider other lower cost options or more appropriate products for you. They can receive kickbacks from selling those products, and they don’t have to be objective in their recommendations. Just how long has this been happening? This legal standard has been written in US law since the Great Depression!

Only registered investment advisors have to follow the much more stringent fiduciary standard and place your interests first. These are typically independent advisors who are paid only by you.

From the Horse’s Mouth
Don’t take my word for it. Let’s hear it straight from the source. Here is what one large brokerage firm says in its “Client Relationship Guide.”

After stating that you can expect “sound financial advice,” this firm states that it receives “a variety of payments for selling the products of...product companies.” For mutual funds, one of the criteria it uses to select which funds are available to its clients is “marketing payments.”

This firm also has a mutual fund program, whereby there are certain mutual fund companies that participate in the program. Financial advisors at the brokerage firm “generally have a greater incentive to offer mutual funds” from funds participating in the program because of the “marketing and sales support provided to our financial advisors” and because mutual fund companies pay the brokerage firm “a portion of the revenue generated from the sale...of mutual fund shares.” Just how high are these payments? Try $128 million that mutual fund companies paid to the brokerage firm in 2009 to market and sell those funds! Guess where that money comes from? You.

The financial advisors at this particular brokerage firm are also supposed to “help you reach your dreams and goals.” They are paid in part by “sales charges you pay on the products and services you purchase.” In addition, these advisors can get rewards points which they can redeem for goods, services, travel and cash when they solicit banking products and insurance products. Wow! What perks do you get during a typical shift?

Bottom Line: Make sure you choose a financial advisor held to a fiduciary standard.

Setu Mazumdar, MD practices EM and he is the president of Lotus Wealth Solutions in Atlanta, GA www.lotuswealthsolutions.com



 

 

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