Certain people within professions are given ‘Fiduciary Responsibility’ and it has been my experience that they can use this to betray our trust. This post will explore what being a Fiduciary means, why it is flawed, and how it can be used against you.
The term Fiduciary is given to people who act in a position of professional authority within a trustee and beneficiary relationship. Examples of this could include some (but not all) Financial Advisers, who are managing money for others and certain directors of organizations, for example in New York a Co-Op board that is representing the needs of the co-operators has a fiduciary responsibility towards those members.
The responsibility of the Fiduciary is to act in the best interests of the person that they represent, in essence they are supposed to take over the decision making process for you, and put your own interests above their own.
Where it breaks down
The problem that I have found with Fiduciaries, including several personal experiences this month has been that many do two things that actually go very much against the spirit of the role. Firstly they sell their services based upon the power of this covenant, and in doing so will imply, frequently with an explicit sales pitch, that acting in the Fiduciary capacity means that they do no harm and they are acting in your best interests. The second thing they do, is not act in your best interests at all, and act in a manner that protects their own position.
The problem with the role of a Fiduciary is that it is enforced punitively by a governing body, if the practitioner acts in a manner that might threaten this status the governing body has the power to strip them of all granted authority. Taking a financial adviser as an example, they are now incentive to maintain their Fiduciary status above all else. If you take a person who has acquired a CFP and is acting as a fee only financial planner with a book of business, if you strip them of their title and of their ability to act in this manner you damage their income, they may even lose all the business they have developed and become ruined.
In reality then, what you have created, is a professional that is dependent on the good graces of a governing body for their livelihoods. And what that means, is that there is no Fiduciary responsibility in play, instead it is replaced with the desire to act within the parameters of their governing body above the desire to act in the best interests of their client relationship.
Actually Giving A Crap about people is not Fiduciary
What I have learned, is that the Fiduciary angle is a selling point, and is it dichotomous with actually caring for the people you work with. In this month I have experienced not logical debate on ethics with these professionals, but attempts to bamboozle using industry terms and regulations, heck even the word Fiduciary carries gravitas sufficient to intimidate.
To cite my most recent experience, I was reviewing a product that was designed to create a financial plan for free, what that means is that it is for people who cannot afford a Planner, and therefore people who need the most help possible. When I dug into the product I noticed that some of the algorithms were off, as an example, I made a profile for myself, married at 37, no kids; entered random amounts of $15,000 for monthly income, $3,000 for monthly expenses, owning a home outright, and zero debt. The software advised me to take out $3M USD of term life insurance.
As you know, I love my wife dearly, but there is no way I am setting up a $3M plan for my demise, heck that is actually incentizing her to start hatching plans to off me. I called them out on this level, asking why the software would recommend this, and their answer was it calculated on income replacement at 80%.
The Fiduciary view on Life Insurance
There are different ways to calculate the ‘proper amount of life insurance’ and if you use these approved ways it seems that you are acting as a fiduciary… one is income replacement, and another is expense replacement. Income replacement would require $3M USD in my example, expense replacement would require 1/5th of that. The latter is designed to clear off all your debts (mortgages etc) and then cover your monthly expenses. In my theoretical example my debt is zero, my monthly costs are $3000, so covering expenses with insurance is really easy to do (in fact, it could even be covered by my wife just working).
Here’s my issue with that software product:
- It is targeted at low net worth people – because high net worth people can afford a real adviser
- It offers advice to these people in an imperfect manner
- It defends the imperfect advice by claiming it is acting as a Fiduciary
When I spoke to the President of this company about this the answers I was given were: the 80% replacement rule is an accepted industry practice, that 65 million Americans have no financial advice so this is better than nothing, and giving too much insurance is not a bad thing compared to an (non fiduciary) insurance salesman trying to sell them a Whole Life policy.
What they have done though, is outright suggested that a person who is less well off (their target customer) become woefully over-insured, and wasting money on premiums that would be better spent on other areas of their life, such as reducing debt and increasing savings. Further to which, if they simply cannot afford such premiums they are creating unneeded stress and pressure on that person.
You have to care about the impact of your work
The advice that a low net worth person needs has to be as ‘bang on accurate’ as the most wealthy client. Their needs and trust need to be understood and solutions must be tailored for their best interests. In fact, I would argue even more so. The poorest strata of our society are frequently abused and manipulated from a financial perspective, it is our responsibility to ensure that their best interests are above our own. If anyone, ever, creates a mass market product aimed at these people it has to be on point. The draw of mass market is frequent, smaller revenue transactions on a grander scale, but if that is your goal, rather than really helping the audience, you don’t care about your work and you aren’t acting in the spirit that you should be.
It can’t be ‘better than nothing’ when acting not in their best interests.
It can’t be ‘Fiduciary’ in that it will stand up to review on some tenuously accepted industry norm.
It has to be right.
Conclusion
I have heard enough spin from Fiduciaries this year, and seen enough actions that show that they are really acting in their own best interests, protecting their status and position and not putting the client first, even though it may sound like it, to realize that the Fiduciary status of a person is not something that you should trust. People over sell it.
There are people who care and people who don’t care in roles that have fiduciary and non-fiduciary responsibility, don’t buy into the pitch that acting in this manner is in your best interests and therefore makes them a better adviser, due to the nature of the role professionals with fiduciary responsibility are most focused on retaining the status, and whilst that means they will act within well established parameters to help you, it doesn’t mean that they will give you the best advice for your situation.
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