What A Fiduciary Standard Could Mean To You

This week's blog is rather lengthy, but it's important, and I hope you find it interesting. Here goes:

You may have heard recent talk about a "fiduciary standard" for financial advisors. The new financial regulation package includes a provision for the Securities and Exchange Commission (SEC) to study the issue for a year. Then, after the study is complete, the SEC will set new rules regarding the fiduciary issue.

So what does this mean, and how does it potentially affect you and other consumers of financial advice? The short answer: It is very important, and it could have a very large impact on all advisors and their clients.

The business of investment advice is highly regulated, and one must be precise in the language and terms used. On the surface, the concept offiduciary duty is pretty simple. The word can be used as a noun or an adjective. It describes a very high duty to act in the best interest of another person-to put that person's best interest above your own or (in the case of financial dealings) your firm's.

My firm is a registered investment adviser. That simple sentence carries subtle but meaningful nuances. (1) Note the arcane spelling of "adviser;" the SEC stubbornly clings to that spelling, although they don't punish firms that spell it with an "o" like everybody else. (2) Aperson cannot be a registered investment adviser/advisor; the firm is the adviser-a person can get in real trouble for using the title to describe himself.

See what I mean about it being a highly regulated business?

Now, here's where the controversy occurs. You see, when it comes to financial consultants, there are two very distinct business models:

The first is the traditional broker: this person, as the name implies, is in the business of brokering transactions. He/she gets paid a commission for facilitating a trade or making a sale. Technically, this person is not even allowed to give financial advice: any advice he/she gives must be purely "incidental" to the sale or transaction. What exactly does that mean, you ask? It means that, strictly speaking, when a broker gives advice to a client, he/she is breaking the law. But everyone knows that brokers give advice all the time.

 The other business model is that of the registered investment advisor (RIA); that's what our firm is. (Notice that I specified the firm as the RIA.) The advisor gets paid a fee for advice and/or portfolio management, and nothing for conducting transactions.

The registered investment advisor firm is subject to a fiduciary duty. The broker is not. His/her duty is simply to be reasonably sure that whatever investment they sell is "suitable" for the client. That's a pretty vague standard, and not very reassuring once you fully understand it; hence the push to subject all financial professionals to the fiduciary standard.

Very few people are even aware that there is a difference between brokers and advisors. Most consumers assume that both are required to act in the client's best interest. So the SEC has been assigned to try to settle the issue.

The brokerage industry is fighting the potential new rules tooth and nail. They say it's impractical. For my part, I'm conflicted about it. While I strongly believe that there should be a uniformly high standard for all, I must admit that the current dichotomy gives me a marketing advantage. (You may notice a fiduciary slant in some of my print advertising.)

But really, I'd gladly give up that advantage if it meant better protection for all consumers. Doesn't it make sense that your "advisor" should always have your best interest at heart?

We'll see what happens. In the meantime, enjoy your week!

The Absurd Result of a Logical Assumption

During a conversation with a client last week, an interesting thought occurred to me. It's an observation that confirms the absurdities of the stock market. See what you think about it:

The stock market has a pretty good track record of presaging the direction of the economy. And the stock market is completely directed by human beings: men and women buy and sell the stocks that make up the market. So one might logically conclude that the people who make the market tick should be able to predict the market's direction.

But they can't. In study after study, the gurus with all the inside dope have been shown to be no better at predicting the markets' direction than a blind monkey with a dartboard. For some reason, this ironic fact strikes me as funny, frustrating, and reassuring all at the same time.

There's an important lesson here. While we naturally want to believe that there are people out there who can see where the markets are headed, there are no such people.

Clients occasionally will make a comment such as, "If any of your contacts sees that the market is headed for trouble, go ahead and get us out." Well, on any given day there are many such predictors of catastrophe. On the same given day, there are also predictors of unprecedented growth. We can't believe any of them, because none of them is correct often enough to be considered reliable.

Moral of the story: Trust the markets, but don't trust the people who run them

Have a great week!

Ben Franklin in Words and Pictures

This week, I'd like to share a book I read recently. It's not exactly the kind of book I usually read, and I didn't find it in a place one usually finds books. Click on the video link below to learn about it: 

Have a great week!

-Andy

A Serendipitous Encounter With And Early Mentor

With my early mentor, Susan Allred.

I had a delightfully serendipitous encounter on Saturday, and I'd like to share it with you.

It was Tryon's 125th anniversary celebration. The weather was perfect, and the streets were filled with locals enjoying one anothers' company and reminding themselves why they decided to come here (or stay here) in the first place.

The day included a parade (perhaps the best one Tryon has seen in many a year), booths hosted by local organizations, demonstrations and displays of historic events, and lots of visiting.

As I was walking up Trade Street, a pert little lady stopped me and said, "Excuse me. I'd like to introduce myself. I'm Susan Allred."

Wow! In a flash, it all came back: It's a lifetime ago, my first day as a brand-new teacher at W.P. Grier Junior High in Gastonia. I am assigned to teach remedial English to a very challenging group of ninth-graders. I'm twenty-four years old, have never taught a lesson, and don't have a clue as to what to do. What's more, because the principal thinks it would be good for me, the mess that is young Mr. Millard has been wedged into the well-ordered classroom of the formidable Miss Allred, a master teacher who tolerates no nonsense.

But, for some reason, she does tolerate me. She graciously allows me to conduct my clumsy lessons in her room during her two daily planning periods. She takes me under her small but powerful wing. She's wise, cheerful, supportive, nurturing, and calm: everything a wet-behind-the-ears newbie needs in a mentor and role model. She shows me what it means to be a professional educator.

And now, here she was twenty-nine years later, chatting with me on Trade Street. She's now Director of Education Recovery for Eastern Kentucky and living part time in Rutherfordton. She recognized me and re-introduced herself. As far as I can tell, she hasn't changed a bit.
That encounter, along with the entire glorious day, made me grateful for the many people and events that have contributed to my life. On this Labor Day week, when we pause to appreciate the hard work that makes our society tick, that seems like an appropriate thing for each of us to do.


Have a great week!