That’s The Way The Cookie Crumbles
The term “Fiduciary” is a hot buzzword in the financial industry these days. Unfortunately, its frequent use leads to misuse, and it’s easy to forget the level of importance a fiduciary actually holds. Not all financial advisors are fiduciaries, but those who hold this title are required to put their client’s financial best interest ahead of their own at all times.
Sadly, financial advisors don’t always hold up their end of the bargain, and as a recent Lancaster news article highlights, failure to fulfill this duty can prove costly to clients and advisors alike. The article referenced here highlights a local firm that lost a two-year battle with the Securities and Exchange Commission (SEC) just last month. The jury ultimately decided the firm had committed advisory fraud by not fulfilling their fiduciary duty to disclose conflicts of interest.
The particular conflict of interest in question? Placing mutual funds in client portfolios that paid the firm’s advisors commissions despite available share classes of the exact same funds carrying no commissions. The commissions, known as 12b-1 fees, were charged in addition to the firm’s advisory fee resulting in increased profit for the advisors at the cost of diminished investment returns for the client; the exact opposite of fiduciary behavior.
The details may be a bit technical, so just imagine if someone sold you a package of Oreo Double Stuf Sandwich Cookies™ only to crack them open and lick off some of that delicious creme center before handing them over. You don’t need to be a fiduciary to see the serious injustice in this scenario. You paid for the Double Stuf – you should get the Double Stuf!
A Few Takeaways
A couple of things stood out to me as I digested this news article. First, I should stop writing blogs when I’m hungry.
Second, this cautionary tale dispels the conventional wisdom of “safety in numbers.” The local firm had over 30 employees. In a fiduciary environment, you would hope that at least one employee would recognize the conflict of interest and speak up. Perhaps someone did, but it ultimately took external accountability by the SEC to hold the firm to its fiduciary duty.
Third, an advisor representing themself as a fiduciary is obviously no guarantee that they will indeed act as one. Trust is perhaps the biggest premium in an advisor/client relationship. It’s often the sole basis for a client choosing to work with a particular advisor. Once broken, it’s difficult, if not impossible, to rectify. This is why I often ask prospects if they have worked with an advisor in the past. I am looking to see if I will be dealing with any PTAD (Post Traumatic Advisor Disorder)!
“Fee-only” Is The Difference
“That’s the way the cookie crumbles” is used to denote a bad situation that we have little choice but to accept. When it comes to financial advisors though, do clients really have to settle for the crumbles? The answer is an emphatic “no.” And while this blog is by no means an attempt to “dunk” on a local advisory firm in the middle of legal woes, it does serve as a reminder to why Evenkiehl was founded as a fee-only fiduciary.
“Fee-only” is imperative because it means Evenkiehl cannot accept commission-based pay of any kind. It means there are no additional entities offering monetary incentives for our business. This frees us up to implement the best, lowest-cost funds we can find for our portfolios while keeping more money in our clients’ accounts. Don’t settle for the crumbles. Find yourself a “Double Stuf” fiduciary.
