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Wednesday, April 6, 2016

Your investment manager might soon be legally obligated to actually give you good advice!

The U.S. department of labor is doing something awesome: Proposing new rules that might actually require investment managers to do what is best for you, the client, not just what is best for their own wallet! Source

When you use the services of a real estate agent to buy a home, they have a "fiduciary duty" to you. That means that they are "obligated at all times to act solely in the best interests of the client to the exclusion of all other interests, including the broker’s own self-interest."

And even with the fiduciary duty, you will still find realtors who subtly (maybe even unconsciously) will recommend a buyer takes a deal for $5,000 less. They know it will let them close the deal faster, get their commission, and move on to the next sale to bring a paycheck home to feed their kids and provide their spouse with the best they can.

Imagine the conflict of interest in the investment arena, where there is currently no requirement for fiduciary duty!

Suppose a financial advisor is going to recommend you put your $100k in either:
  1. A low cost index fund which earns him zero commission, he relies on his salary
  2. A front loaded (5.75%) mutual fund with 1% expense ratio. He gets half the sales load instantly ($2,500) as well as half the sales load of all future contributions. He also gets an extra commission (part of the expense ratio) from the fund company for convincing another person to invest with them.
He can justify it to himself: "But this is a great fund! I personally know the fund manager and he is brilliant. He made $50 Million last quarter!" The fact that he gets an extra $2,500 to take home to his wife or upgrade his car or put his kids in a more expensive private school "is just a side benefit" Maybe he does have good intentions (although I doubt many of them do.). But the fact of the matter is that statistics show over and over again that high expense, managed mutual funds grossly under perform index funds.

Why should realtors have a fiduciary duty to their clients, but not investment managers? I would think it's even MORE important in the latter case.

Ed Gjertsen, national chairman of the Financial Planning Association in Denver (who is against the proposed rules) said both of the following quotes:

Why wouldn’t an adviser have a client’s best interest at heart? Why do we even need a rule to enforce it?

and yet he also says:

Many firms will have to revamp their business practices to retrain all advisers to do what is in the best interest of clients.

Doesn't the second quote make it pretty obvious that NOT having one's client's best interests at heart is the industry norm right now?

2 comments:

  1. Ah, now I see what you mean! lol No, my name is Trish. Better known as KnightMuse :-)

    ReplyDelete