You may have heard the term “fiduciary” used in the context of financial advisers. It may seem like one of those inside-baseball gibberish terms, but working with a fiduciary, rather than just a stockbroker, could save you some money and help create a better outcome.
In the financial advisory world, a fiduciary is an adviser or advisory firm that has a legal and ethical duty to put your interests first. It may surprise you to learn that not everyone who calls himself or herself a financial adviser holds that obligation. Many are fiduciaries on your individual retirement accounts, but not on your trusts, joint accounts with your spouse or partner, or other accounts without tax-preferred status.
I’m always shocked at how many investors don’t know or care whether their advisor adheres 100 percent to the fiduciary oath. Not only that, but many investors are content to settle for substandard service, or barely any service at all.
There are several areas of confusion that many so-called advisers fail to discuss with their clients.
That plan you purchased is not so comprehensive. Everybody likes the idea of financial planning. But few understand exactly what it should be. It’s not a budget or a list of stocks to buy. It’s not a spreadsheet with projections of how much your investments might return. A comprehensive financial plan includes a portfolio risk analysis, assessment of internal expense ratios (aka, hidden fees — more on that in a minute) cash-flow projections, insurance analysis, tax planning, estate planning and an evaluation of your health care expenses, among other factors.
If your plan doesn’t include those elements, then you paid for something that’s essentially worthless. Also, forget about those stand-alone plans, where you pay somebody by the hour to crunch numbers. Most of those one-and-done plans end up gathering dust on a shelf. Since you paid for a one-time service, you have nobody to help you with important financial decisions that crop up all the time. Have you ever purchased a do-it-yourself book or online course and then forgotten all about it? A one-time, stand-alone plan works the same way. You intend to follow the planner’s instructions, but that usually doesn’t happen. With regular, ongoing coaching and consulting from a fiduciary, you’ll have a greater chance of achieving your goals.
You are paying hidden fees, some of them quite high. This one floors me because it’s so unnecessary, and because so many investors simply don’t care. People pore over cellphone bills, medical bills and other statements to make sure they understand every last cent. Yet, when it comes to financial advice, a shocking number of people have only a vague idea, or no idea at all, of how much they are paying. I often ask people how much they are paying as a management fee, and many have absolutely no idea.
More egregious are internal fund expenses lurking inside your portfolio. If you are working with an adviser from a national chain (and most in New Mexico are beholden in some way to a Wall Street firm), it’s likely you own expensive, actively managed funds.
Some funds cost significantly more than others, due to high salaries of managers, excessive trading fees and marketing costs. Guess who pays these fees? You do. Yet, when I write about this or talk to people about this in workshops, many seem to shrug, as if overpaying is inevitable. It’s like that time a few years ago when I paid $5 for a can of ginger ale during a hospital stay. Maybe hospitals can get away with that, but I don’t understand why advisory clients accept expensive products that perform no better (and often worse) than less expensive investments.
You have no real strategy for severe market downturns. On the surface, it may make sense to shuffle your portfolio holdings in response to the daily news, or an economic forecast. After all, you want to protect yourself against a downturn.
However, bailing out in a panic or chasing some “opportunity” tends to result in a worse outcome than sticking to your predetermined allocation. The gurus are there to entertain you, not give you personalized advice, tailored to your unique situation. Sadly, many advisers were trained in the culture of selling products at the national brokerage firms, and still trade in and out of your account in reaction to news events.
While they can craft a seemingly compelling argument for shuffling things around because of CNN’s top story, there’s a big problem. These actions are guesswork, not economic science. Less than two years ago, there was widespread panic when the United Kingdom voted to leave the European Union. Many financial “gurus” predicted utter decimation of the British economy. That has not happened. An index of British stocks is trading 24 percent higher than right after the Brexit vote. Yet, many panicked and missed out on the subsequent U.K. growth.
The upshot? Be very careful about the advice you are getting. Is it limited, expensive or utterly lacking a long-term strategy? There’s no reason for you to continue paying for lackadaisical or irresponsible service.