Ryan Frailich, CFP®
Death of the Fiduciary Rule
Imagine going to buy a new winter coat. You’re average height and weight, and live in a city that doesn’t usually get below 30 degrees. You need something to provide a little warmth, but since you drive yourself to and from work (i.e. no waits for public transit), you’re rarely outside more than few minutes at a time during the cold months. It doesn’t need to stand up to a Midwestern winter. You like basic, simple clothes and put almost no thought into your fashion aside from it being functional.
Salesperson walks up. You explain you need a coat. They ask a few questions about it, and you explain the points above. In the ensuing few minutes, they proceed to show you:
A long thick black trench coat which costs $350
A heavy, size XXL leather jacket which costs $450
A raincoat with bright colors, which is very popular this year. It costs $150
A simple navy blue peacoat. It costs $125
Now, imagine the salesperson gets paid differently depending on what they sell. You don’t know their pay schedule, but it goes as follows:
For the trench coat, they make 5% of the purchase cost, or $17.50.
For the heavy leather jacket, they make 10% of the purchase cost, or $45
For the raincoat, they make 10% of the purchase cost. Salesperson makes $15 on each sale, and also, if they sell 20 of them this month, the store enters them in a drawing for an all expenses paid trip to a beach resort.
For the peacoat, they make 5% of the cost, or $6.25.
Which coat do you think they’re going to work hardest to sell?
Obviously this is an overly simplified example, but this is how the vast majority of the financial “advice” industry works. You pay different amounts for different products, and it’s often difficult to know what you’re paying. Because of incentive structures, you may get sold something that might be appropriate for someone else but does not make any sense for you. To compound the problem, the vast majority of people who use the title “financial advisor” may not have any credentials showing they are qualified to give advice, but instead hold licenses to sell financial products. It’s not impossible to get the right solution for you, in this case the peacoat, but it’s definitely a lot less likely than it should be.
There was hope over the past few years that progress was being made to rectify this, with something called “The Fiduciary Rule.” This rule would have required all advisors giving advice on retirement accounts to meet a fiduciary standard, or translation, to put the clients best interest first at all times.
The rule got officially killed last week after a lengthy court battle. *Most* people in the financial industry are not in any way legally required to put your interests ahead of their own.
That is completely and totally insane.
Over the month of July I’ll dive into this issue deeper and provide some more background on the following:
What is a fiduciary? How is that different than a financial salesperson?
How do I determine what type of advisor I should work with?
How much is appropriate to pay my advisor?
Do I even need a financial advisor?
Stay tuned for those, but for now, here’s more on the death of the fiduciary rule: