To Be – Or Not to Be – A Fiduciary

In 2013, University of Chicago professor Harold Pollack and author Helaine Olen were conducting an online conversation about the excessive complexity of financial advice. Pollack claimed that everything one needed to know about personal finance could actually fit on a 3-by-5 index card and, when asked to do so, posted an image of a hand-written card with his nine core principles.

The card’s image quickly went viral – academia and media alike wrote about Pollack and Olen’s index-card keys to personal finance – and has now turned into a book. (To the natural question that arises, “Why do you need to write a two-hundred-page book if personal finance is simple enough to cover on an index card?,” Pollack responded that even the Ten Commandments needed some explanatory accompanying material.)

Interestingly, nestled among the admonitions to max out your 401(k), pay off your credit card each month, and watch out for fees is this nugget: “Make [your] financial advisor commit to a fiduciary standard.” This admonition arises because at present, there are actually two standards of care that pertain to financial advice. Under the suitability standard, investment recommendations should merely be suitable to a client’s specific situation, given financial goals, income, and age. Under the fiduciary standard, by contrast, financial advice must broadly be un-conflicted and in the best interests of one’s client.

Last April, the Department of Labor released new rules binding any financial professionals who provide advice or products for retirement accounts to adhere to the fiduciary standard, including acting in the best interest of clients, disclosing all conflicts, and ruling out many commission-based rather than fee-based compensation schemes. However, earlier this month, President Trump signed an executive order directing the Secretary of Labor to analyze whether or not the fiduciary rule would harm investor access to retirement savings and advice, adversely affect investors or retirees, and increase litigation or prices charged for retirement services. The executive order came with the instruction to rescind or revise the rule if the Secretary made an affirmative determination on any of these points.

While the ultimate fate of the Department of Labor’s fiduciary rule remains to be seen, industry and advocacy groups take their stands. Proponents argue that requiring a fiduciary duty would save investors from sub-optimal money decisions, driven more by opaque commissions paid than by true investor need. After all, the compounded deleterious effects of higher fees over an investment lifetime can spell a significant reduction in quality of life upon retirement. Meanwhile, opponents argue that it will become uneconomical for advisors to provide any services to low-balance accounts, increasing the “advice gap” between wealthy and middle-class investors. They point to the introduction of a similar reform in the UK, the Retail Distribution Review launched in 2012, which the acting CEO of the Financial Conduct Authority admitted was causing industry exit and making it more difficult for the less-affluent to obtain advice.

As pertains to the affluence advice gap – an important issue – a potential solution in the coming years lies with low-fee, streamlined robo-advisors. Because of the benefits associated with their scale, robo-advisors may help democratize financial advice, ensuring that lower-balance accounts can both receive advice in their best interests and still be serviced profitably despite growing compliance costs.

At Chatham, we don’t directly advise individual investors on their retirement accounts, but we do hold ourselves to the highest standard of care as we advise and serve our clients. The only risk management strategies or specific hedging instruments that we recommend to clients are those we would adopt ourselves in the same circumstances. The only compensation we receive on transaction advisory, structuring, and execution is from our clients, in the form of transparent fees rather than hidden commissions. On countless occasions, we have said no to higher fees for our firm because those fees would have accompanied a recommendation that was not in our clients’ best interests.

Whether or not the Department of Labor’s fiduciary rule remains intact, we believe financial firms must resolve to place trust at the center of their decision-making and approach to clients. At Chatham, our commitment is to work for your best interests each day, and always be worthy of the trust you place in us.