Butchers, Brokers, Dieticians and Fiduciaries

In the world of healthcare, representatives of pharmaceutical and medical device firms do not administer advice directly to patients. This avoids the inherent conflicts of interest as representatives have a natural incentive to sell as much of their product and this could influence the advice in a manner that it is not in the best interest of the patient. Unfortunately I wish I could say the same for the financial care field.

The financial service industry doesn’t always require the same level of care – it can differ from firm to firm. Some financial service firms recommend products that they create or holdings they have on inventory that they don’t deem worth holding onto anymore. Some are required to act in your best interest first while others only have to determine if a product is suitable. A recent New York Times Editorial by former Goldman Sach executive Greg Smith and the Fox News report “Citigroups Embarrassing E-mails” sheds some appalling light on how the financial customer could be adversely affected in some cases.

What can you do? The first thing that you can do is understand the difference between a fiduciary arrangement and a brokerage engagement in a financial service engagement. A great whiteboard video showing the difference was produced by Hightower Securities which compares brokers to butchers and fiduciaries to dieticians. In simple terms, you don’t want to ask a butcher if a certain cut of meat is healthy for you.

If you then believe that your financial service advice you receive should be held to a fiduciary standard, I recommend going to The Committee for The Fiduciary Standard website a pull up their Fiduciary Oath. I would print this and provide this to your current or prospective financial adviser to sign. If they sign this, it doesn’t eliminate all potential conflicts of interest, but it requires disclosure of material items and that the adviser acts in your best interest. If they refuse to sign it, at least you know the type of engagement you have and you can make the decision to continue the engagement or move on.

Finally there is a debate going on in Washington concerning the subject as some parties don’t feel a fiduciary obligation is necessary or is too onerous and would prefer things to remain “as is” or to create a watered down definition. Unfortunately many of our elected officials haven’t expressed an interest and/or expertise on the subject. If you feel this is important, I recommend that you forward the above whiteboard demonstration to your representatives.

More Versus Just Enough

We live in a society where more is better. Bigger house, better house, nicer car, nice clothes, more stuff in general. This includes bigger portfolio values, higher returns or chasing yields. This mentality that has run amok the last thirty years has finally caught up with us. The global deleveraging is going to take a while to filter and we’ve gone through three bubbles in the last decade due to greed.

There’s nothing wrong about wanting more. Elements of this keep us motivated and allow us to strive to improve. If a person is doing all the right things financially and life puts them ahead of the game, they have options. Sure the person could expand on their goals and continue to work, take the same level of risk in their portfolio, expand on their planned expenditures and continue to save or save more.

But there’s a cost to all of this. You can continue to strive for more, but the risk can remain the same or increase because of it. Or you may be sacrificing your current lifestyle only to end up with more money than you will ever really need. Equal time should be given to just enough. If you are ahead of the game, there is also nothing wrong with retiring sooner, paring down debt, saving less, spending more or taking less risk in their investment strategy. Many of these choices lead to less material wealth, but a lot less risk is involved. Not having to worry or being able to sleep at night does have its virtues. If you can afford to make these choices, they should be considered.

This is where financial planning has its value. It can help draw the line between more and just enough and giving you the option to continue to have more or decide that you have enough. Unfortunately most people let their investments and underlying investment performance dictate their goals when in reality it should be the other way around. I suspect that many people were ahead of the game before the tech bubble burst or before the financial crisis of 2008 began, but they didn’t realize it. Hindsight is always 20/20, but I’m sure that if many people knew the level of risk they were talking in their lives, they would have done something about it.