Tuesday, April 30, 2013
Go Ahead, Drop the F Bomb
About twelve years ago I decided it was time to get serious about investing so that some day I could retire. I knew my knowledge and experience was inadequate so I set out to find a teacher. There aren’t any. Financial advisers do not want you learn how to fish. It would put them out of a job. So I sought out a financial adviser. What I found were mutual fund salesmen. A mutual fund salesman is not a financial adviser. He is a commission salesman. He can’t sell you anything that is inappropriate, but he can choose reasonably appropriate products that do the best job of lining his pockets. I did discover one, for real financial adviser. Unfortunately, he wouldn’t talk to anyone who was unwilling or unable to commit at least $1,000,000 for five years. That left me out. I did find a newsletter that was pretty good. At least it taught me the basics of value investing and pointed me in the right direction to start my still ongoing learning process. Be careful about newsletters and their claims. No one can see into the future. There are some legendary investors like Warren Buffet who have an incredible track record, but they do not sell newsletters. Christians always talk about stewardship. That means they believe, at least on some level, that they don’t really own anything. What they have belongs to God. They are just managing those resources on his behalf. I got a long way to go on this one, but I am getting better. Back in the day the Duke didn’t have time to manage his finances, farmland, and peasants. He was too busy fighting wars, engaging in political intrigues, and chasing his mistress around the mead hall. He hired a steward to take care of the business of running his dukedom. This made the steward the second richest man in the dukedom. If he screwed up, the duke could always execute him. If the steward really screwed up, the duke could have him tortured for a while before executing him. Unfortunately, we no longer have that option when choosing to dismiss a corrupt or incompetent financial adviser. If you insist on using a financial adviser, find one that works to a fiduciary standard. Wikipedia states, “A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.” If a financial adviser isn’t willing to sign a written oath he isn’t a fiduciary. Even if a financial adviser is willing to sign a document establishing a fiduciary relationship with you as his client, that doesn’t mean there is any guarantee you will make money if you follow his advice. However, if he sells you a product that benefits his pockets, you have the basis for a lawsuit. If the financial adviser is working to a fiduciary standard, he will be a fee only adviser, charging by the hour or charging a set price for developing and managing your personal financial plan. He will never work on any commission-based compensation scheme. That is inherently a conflict of interest. If a financial adviser is working to a fiduciary standard, he will reveal any potential conflict of interest, recusing himself if necessary. (Recuse to disqualify (oneself) as judge in a particular case; broadly : to remove (oneself) from participation to avoid a conflict of interest) Merriam Webster As a Government employee working on contracts, I was required to recuse myself from participation in that contract if I owned stock in any of the companies bidding on the contract. Unfortunately brokerage houses actively encourage their brokers to promote the sale of products to their clients that the house may be shorting because they believe the value of that product will fall. When they are caught, lawyers become rich. Rarely someone may go to jail. In the Right Financial Plan by Larry Swedroe, a very good book, the author recommends that his advice is always based on the latest academic research, not someone’s opinion. How do you find out if this is so? Ask. If people make grandiose claims without solid and appropriate references, run away. Cherry picking data is always a tipoff to a lack of academic rigor in financial advice. Finally, an adviser should be willing to meet with a client on a regular basis. Making certain that the entire plan which includes investments, taxes, and estate planning is integrated and up to date. Your goals and your plans are constantly changing with the changes in your life. Reforming the relationship between financial advisers and clients actually was a pretty hot topic following the crash of 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 attempted to address this issue by authorizing the Security and Exchange Commission to extend fiduciary duty to all brokers and advisers. As of March 2013 this has not happened. The financial industry is fighting back, maintaining that, “The higher standard of fiduciary duty, vs the lower standard of suitability, would be too costly to implement and reduce choice for consumers.” (Wikipedia) I am not surprised. The next time you run into someone who wants to be your financial adviser, go ahead have some fun, drop the F bomb. Ask him if he is offering you a fiduciary relationship. Ask him if he would be willing to sign a fiduciary oath. As always, Let’s be very careful out there today.