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Al Jacobs invites you to take a look at his most recent book, Roadway to Prosperity, which embodies the heart of his nearly half-century in the investment business.  You'll find a wealth of information there.





fiduciary n, of, relating to, or involving a

confidence or trust: as  a : held or founded

in trust or confidence

As is my habit for a couple of hours each Sunday afternoon, I hike the hills in my neighborhood, following the open house signs, while listening to a financial talk show on my Walkman radio. Whether I learn anything or not, it’s good exercise. This past weekend I received a 45-minute dissertation on the evils perpetrated on the public because of a federal executive ruling to lessen the role of fiduciaries in providing certain financial services to the retirement community. As massive fortunes are at stake in providing monetary advice and oversight to retirees, discussions on this subject can become heated.

A short explanation of the fiduciary rules is called for. Based upon regulations promulgated during the Obama administration, the U.S. Department of Labor will require financial advisors servicing retirement accounts to be fiduciaries who, it’s presumed, act in the best interests of their clients and put those clients’ interests above their own. In theory, fiduciaries – primarily those in the financial planning industry – are held to a higher level of accountability than will be assigned to financial representatives such as brokers, salespersons and insurance agents who work with retirement plans and accounts. You might note this ruling, which went into partial effect on June 9, 2017, effectively eliminates the many commission structures that for generations governed the investment industry, thereby stripping non-fiduciaries of a most lucrative profession. However, no enforcement is scheduled to be instituted until January 1, 2018.

As you see, a limbo period exists; if there are to be any changes, they’ll be by executive order. And on August 9th of this year, with President Trump now in charge, the Labor Department submitted to the Office of Management and Budget, a proposal to postpone portions of the fiduciary rule for an additional 18 months. This will give brokerage and annuity representatives until July 2019 to try rolling back the entire program, as if it never occurred. Understandably the affected parties are presently at each other throats.

With the circumstances now clearly understood, let’s take a closer look at the financial advisory business and consider the realistic effects of the fiduciary designation. The requirement is the counselor act in the client’s best interests, even if not in the advisor’s best interests. This may have a fine altruistic ring to it, but in practice it contradicts every aspect of human nature. And with even greater uncertainty, how can a client be assured the fiduciary will, in fact, perform in this manner? An answer is provided by Liz Weston, certified financial planner and columnist for NerdWallet: “One way to make sure is to ask your financial planner to sign a fiduciary oath.” My immediate reaction is to suppress the laugh brought on by a truly superb bit of humor … except I don’t believe Ms. Weston is merely trying to deliver a clever joke.

With the background we’ve just developed, it will be helpful to review how securities investment evolved over the past half to three-quarters of a century. In an earlier time most American investors worked with one or more stockbrokers in the selection of specific stocks and bonds of their personal choosing. If the client wanted advice on any aspect of a particular purchase or sale, the broker would normally provide it to the best of his or her ability. For these services the broker received a commission based upon a schedule of fees related to the value of the securities involved. Upon completion of the transaction, no more fees need be paid. For more than 25 years I dealt with a thoroughly capable Merrill Lynch broker who provided me with the services I required; it was a fine relationship.  Although mutual funds existed – having been around since 1924 – these did not constitute a predominant portion of most investors’ portfolios. Those persons who developed a fixation on them as an investment vehicle normally dealt directly with a representative of the fund(s) they selected.

Over the past several decades the specific security method of investment fell out of favor. For a variety of reasons the majority of investors now select a financial planner to direct their investment programs. With few exceptions a typical portfolio will consist of low-cost index and exchange-traded funds. For those persons with both limited expertise and assets, this type of approach seems reasonable, at least for the advisor if not the investor. There’s no particular magic involved. These vehicles merely rise and fall with the general fortunes of the market. Mutual funds now occupy an anointed status within both the investment and legal communities. Under certain limits, advisors are held blameless if their recommendations prove less than astute. And, as expected, with these funds widely touted, natural client resistance is reduced. The result: an industry devoted to investment by default, where the fees siphoned off by the fund hierarchy together with the financial planners and other assorted professionals never end. And for this you’re assured of future prosperity, predicated by a fixation upon the rear view looking glass of time where, in the long haul, the market must go up because it always goes up … while cautioned that “Past performance is not an indication of future returns.”

We’ll now return to the fiduciary concept and analyze how perception and reality can become blurred. The fact a person may be sworn to render an intangible service such as devotion or fidelity is no guarantee the performance will match the assurance. Fundamental honesty and integrity are not qualities to be legislated. My Merrill Lynch broker was not a fiduciary, but he proved over time to be a reliable advisor who I came to rely upon. Never once did he disappoint me. On the other hand, Bernie Madoff, who on June 29, 2009, received a 150-year sentence in prison for a Ponzi-style scheme defrauding thousands of investors out of billions of dollars, was a duly registered investment advisor bound by his fiduciary obligations as he systematically swindled his clients at every opportunity. Obviously an honor-bound obligation cannot be depended upon. For the financial planning activists, who understandably wish to legislate competitors out of business, their irrational linking of fiduciary with purity is not a persuasive argument.

A concluding thought: I do not believe you’re well served by placing your assets into the hands of someone else and letting them select investments without question. Regardless of your expertise – or lack of it – it’s important you involve yourself in the decisions. This means you become as familiar as you can with the intricacies of whatever style of commodities you choose to pursue, be they securities, real estate or whatever. When it comes to the purchase or sale of anything, you must become as knowledgeable as you can over the details. Above all, in every case yours must be the last word. And remember one basic reality: In the final analysis the only person you can always be certain will represent your best interests will be the face staring back at you from the bathroom mirror.




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