Wealth Management & Financial Planning

Wealth Management & Financial Planning

A Call for Transparency in the Financial Services Industry

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Everyone has a fiduciary.  Either you serve in that role or you hire someone to perform fiduciary duties. Fancy words aside, a straightforward way to describe a hired “fiduciary” in the financial services industry is “a person who is legally obligated to care for a client’s money as if it was his or her own money in the same situation.” Compared to a salesperson selling things deemed “suitable,” a fiduciary’s liability and responsibility are much greater.   

A battle within Congress and the Department of Labor has been long and ugly. Political action committees from the insurance and banking industry have been able to keep a lid on the difference between “fiduciary guidance” and “sales guidance.” They argue that the cost of regulation, supervision and mandated licensing would cut into profit margins and people would have to explain previous decisions. But despite their arguments, the Obama administration seems willing to push the fight in the right direction.

According to The Wall Street Journal, “brokers who recommend retirement-account investments would have to put their clients’ interests ahead of personal gain under rules expected to be endorsed by the Obama administration as soon as next week.” Just because things are “sold” doesn’t make them inherently wrong, but I believe there is a cleaner, more transparent way of doing business.

Whether you hire a fiduciary or take on the role yourself, four issues must be constantly under the microscope. First is the risk and volatility related to the type of investments you hold and the discipline you use in making decisions to buy and sell.

Next come fees and expenses which are not the same thing! Fees are identified in the prospectus and established upfront. Expenses represent the additional costs to run the investment (including trading costs) inside the fund. Expenses are unknown at the beginning of the year and thus not disclosed as a fee.  Analyzing portfolio holdings and transaction data for nearly 1,800 equity funds from 1995-2006, Associate Professor Roger Edelen and his co-researchers from the University of Virginia and Virginia Tech found that these “invisible costs” are quite high—even higher than the expense ratio on average.

The next two issues a fiduciary must consider – paying attention to the taxes you pay today and in retirement, and assuring you receive a real return – will have to be addressed in a future article.

Reaffirming an earlier point, I believe a person can have integrity and be honest regardless of being designated as “suitable” by a “fiduciary” standard. What interests me more is the business model in which the decisions are being made. If individuals are better compensated to sell investments that incur higher internal fees and expenses without delivering additional benefit to the investor, then there seems to be an extraordinary conflict of interest.

We live in a world where transparency exists in most areas of our lives. Transparency is key to my firm’s business model and its time has come for the financial industry as a whole.


Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]

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