Amen of the week:
“The myth that profit maximization is the sole purpose of business has done enormous damage to the reputation of capitalism and the legitimacy of business in society. We need to recapture the narrative and restore it to its true essence: that the purpose of business is to improve our lives and to create value for stakeholders.”
- John E. Mackey, founder of Whole Foods (from Conscious Capitalism)
In a video that went viral last week, comedian John Oliver delivers a hysterical – and informative – tirade on why people should insist on using a fiduciary adviser. As many of you know, I am on a personal and professional crusade to educate the world about the most important “F-word” in the dictionary. Utter the word “fiduciary”, and watch people yawn in your face. This is why I salute Oliver for making people laugh and learn why this concept is so critical to people’s financial health. His video has reached several million viewers, but that’s a drop in the bucket. Most remain woefully unaware of the inherent conflicts of interest most financial advisers have.
Would you want your accountant to work for the IRS? Or your doctor to work for a pharmaceutical company? Of course not. Oddly, however, most Americans rely on advice from “advisers” who work for Wall Street firms, which in my mind, is essentially the same thing. Exacerbating this inherent conflict is how most are compensated. Nine out of ten financial “advisers” receive some form of commission from the investments they recommend.* We don’t call car salesmen “transportation advisers”, so why do we bestow fancy titles on financial salespeople?
Here’s an eye-opening example: Think of someone you care deeply about as well as look up to – they’re successful, smart, hard-working. The only stipulation is that they are not well versed in finance or investing. Maybe it’s your mother. Now imagine this beloved person, having saved a nest-egg over the course of her long career, walks into a large brand-name financial firm to receive advice on how to invest her life savings. She sits down with someone who has “financial adviser” on their business card. The odds are very high that she will receive conflicted advice. For example, if your mother hands over $100,000 of her savings to invest, a traditional Wall Street adviser might make as much as $6,000 in commissions if he convinces her to buy an annuity … or $4,000 if she buys a mutual fund … or $2,000 if she buys a bond … or $500 if she buys a bank CD.
The adviser actually receives between one-third and one-half of these commissions in their paycheck (the financial firm keeps the rest). This means he could make roughly $3,000 if your mother invests in the annuity or $250 if she invests in the CD. Hmmm. Think about that. The “adviser” could earn 12x more money for recommending an annuity over a CD. Said differently, he can either make enough to comfortably cover his mortgage payment or instead make less than enough to buy a month’s groceries. Can anyone honestly tell me that this is an acceptable conflict of interest? Would you want your mother investing her life savings with someone who is compensated in this way?
The good news is that it doesn’t have to be this way. There are independent Registered Investment Advisers out there who work on fees only (never commissions), technically work for their clients rather than a financial firm, and are held to a fiduciary standard. Not surprisingly, these advisers are winning clients away from the Wall Street firms as the public wises up. But we’re still a minority. Only about 1 in 10 advisers fit this profile today.* Fielder is one such firm. Is your adviser a fee-only fiduciary?
You can watch Oliver’s video HERE. [Warning to those of you with erudite, refined tastes: it’s racy.
Yours in the Field,
Frank Byrd, CFA
*According to data from Cerulli Associates
** These numbers are for illustrative purposes only and do not refer to specific investments. They are rough estimates based on Frank Byrd’s observations from his experience in the industry. Commissions of specific products may in fact be higher or lower than these figures provided by way of example.
While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein. This information is intended only for the recipient of this email. Under no circumstances should this report be shared with or forwarded to anyone else without the express permission of Fielder.