Why do so few people use non-conflicted financial advisors?

I was listening to the latest episode of the “Animal Spirits” podcast with Michael Batnick and Ben Carlson, and they mentioned a statistic in this (paywalled) Wall Street Journal article: just 2% of the 285,000 professionals giving financial advice in the United States are fee-only financial advisors, who are held to a fiduciary standard that requires them to put the interests of their clients first.

An ocean of digital ink has already been spilled over the Department of Labor’s aborted fiduciary rule requiring advisors on retirement accounts to act as fiduciaries, and the SEC’s decade-long refusal to impose a similar rule on all financial advisors, so I’m not going to repeat that history here.

Instead, I think it’s worth considering why so few investors who, in principle, are the ones that should be most interested in ensuring their assets are invested with their best interests in mind, use fee-only financial advisors. No one would go to a doctor they knew was being paid by a pharmaceutical company to prescribe a certain drug, or a lawyer they knew was being paid to file in a certain jurisdiction, so why do investors go to financial advisors being paid to work contrary to their interests?

There aren’t very many fiduciaries

Unless you stop to think about it, you might not notice just how many “financial advisors” are out there.

I didn’t think about it until I recently drove through a struggling area of central Illinois, and even in a town with blocks of empty storefronts, burned-out buildings, and crumbling houses, there was an Edward Jones office offering “retirement” services. Of course the only “retirement” services they offer are high-cost, variable fixed income annuities with big commissions for the agent who closes the deal.

How is the average investor in central Illinois supposed to even find out how abusive these products are, and that there are financial advisors who put the investor’s interest first? Google? All they’ll find there are another thousand agents trying to sell variable indexed annuities!

Almost every Chase, Bank of America, Citi, US Bank, and Wells Fargo branch in the country has a desk with a little sign next to it saying “financial advisor.” That’s what financial advice means to the overwhelming majority of individual investors.

They’re not accepting new clients

My buddy George Papadopoulos (not that one, the other one) is a fee-only planner in Michigan. He seems skilled and conscientious, and his clients seem satisfied with his work. And he hasn’t accepted new clients since 2017.

It’s not his fault: providing skilled, conscientious, fiduciary advice is hard work. Why would anybody do any more of it than they absolutely have to?

By contrast, nobody’s ever been turned away from a Chase branch because the branch “has enough clients already.” Make an appointment (or don’t!) and somebody will be able to see you the same day, they’ll have all the forms ready for you to move your assets over, and you’ll be on your way in no time.

They have transparent fees

The most common argument made by the non-fiduciary crowd is that sure, they might churn accounts a little bit than they should, they might buy and sell securities that aren’t strictly speaking in the best interest of the client, but if they weren’t allowed to do that, then investors wouldn’t get any advice at all because investors aren’t willing to pay for it.

And anyway, the products still have to be “suitable,” and maybe sometimes they’ll even outperform the market!

Compare that to a fee-only financial advisor who gets paid directly by the client, instead of through commissions, marketing fees and sales charges. It’s a lot less fun to pay a fee you’re billed directly than one that’s extracted one trade at a time whenever your broker has a hot new investment idea.

I think unbiased financial advice is worth paying for (if you’re willing to take it), but it never feels good to pay for something, especially when down at the bank they’re telling you that all of their fees are “included.”

They’re boring

Since the correct thing to do with your investments in 99.9% of circumstances is nothing, the client of a fee-only advisor often finds herself in the bizarre situation of paying someone to tell her not to do anything, and that everything will be fine.

Meanwhile, a commission-based advisor can’t wait until the next big market downturn, or upturn, or increase in volatility, or decrease in volatility, so they can tell you the market environment has completely shifted and it’s time to incur another batch of trading commissions.

Yield curve flattening? Better do something. Dollar weakening? Better do something.

But a fiduciary who puts your interests first should know better than to chase performance, overtrade, and overpay for active management that’s almost certain to underperform low-cost mutual funds (and ETF’s, if you’re so inclined) over the medium and longer terms.

Quality is tough to measure

A fee-only advisor acting as a fiduciary can’t accept the legalized bribes that non-fiduciary advisors accept. But it’s not enough for a doctor to free of conflicts with the pharmaceutical industry, you’d also like them to be a skilled medical professional. It’s not enough for a lawyer to be unconflicted, you’d also like them to win your case.

Likewise, a financial advisor without any conflicts at all can still give bad advice, and for someone without any investing experience bad advice sounds pretty much the same as good advice.

Just like buying socks, toothpaste, or contact lenses, if you don’t know how to distinguish good products from bad products in advance, you can either buy the more expensive version (hoping that price does the work for you) or the cheapest (hoping that you save more in cost than you lose in quality).

Unfortunately, when it comes to financial advice, the question of whether it’s good or bad depends just as much on you as it does on the person doing the advising. A fee-only, fiduciary financial advisor is perfectly free to advise a strategy of building a highly-leveraged real estate empire, a fleet of lobster boats off the coast of Maine, or a pile of gold in a safe deposit box in Switzerland. They just can’t be paid by anyone else to suggest it.

If you don’t know what kind of investor you are (or want to be), it’s almost impossible to identify a financial advisor that’s able to help you meet your goals.

“Fee-only” is used as a kind of talisman by the financial planning industry, but you should think of it as a necessary, not sufficient, requirement for your financial advisor.