Who Can You Really Trust With Your Financial Future?

Volume 19, Issue 4

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According to a recent study, educated and informed consumers may be losing their trust in the financial services industry. After rebounding steadily since the 2008 financial crisis, the 2018 Edelman Trust Barometer* reported a drop of 20 points in the informed public category. This segment is comprised of the top 25% of household income earners, aged 25-64, who have a college education and report significant media consumption and engagement in business news, a category that many university professionals are likely to find themselves in.

Consumers' continued mistrust in the financial services industry is not unfounded. Illegal business activities at Wells Fargo have been brought to light and include the opening of as many as 3.5 million fake accounts, modifying mortgages without client authorization, overcharging for fees, and brokerage advisors allegedly recommending complicated and risky investments to their customers that were "highly likely to lose value over time." 

In addition, several prominent universities are grappling with lawsuits over allegations of 403(b) plan mismanagement and breach of fiduciary duty. These are just two of the recent and impactful headlines that directly impact retirees, causing many to wonder…

“Who can I trust with my financial future?”

The Fiduciary Rule Falls Short

Many thought the Department of Labor’s 2016 “Fiduciary Rule,” would be a turning point in the industry. The rule would have required that all financial professionals who work with retirement plans or provide retirement planning advice be legally bound to always put the needs of the client before their own. If successful, the rule would have required these individuals change the way they do business and serve clients as a “fiduciary,” a responsibility already adhered to by lawyers, estate trustees, and independent registered investment advisors. The compliance date was delayed several times, and in June of 2018 the U.S. 5th Circuit Court of Appeals officially vacated the rule. 

In anticipation of rule going into effect some companies had already begun implementing internal reform, though many have since been rolled back or watered down. However, one positive change did endure. The Certified Financial Planner Board of Standards Inc. expanded its fiduciary requirement, maintaining that all CERTIFIED FINANCIAL PLANNER™ certificants act in a client’s best interest when providing financial advice. Previously, this standard was only required when providing financial planning and did not necessarily cover investment advice.

Conflicts of Interest

Why didn’t these professionals need to act as a fiduciary when providing investment advice to their clients before? This question raises an interesting point about the current relationship structure of investment advisors, their employing firm, and the clients they serve. 

In the current financial services landscape, most people in the business of giving financial and retirement planning advice work for a company that creates, markets, and sells their own investment products. Often these advisors are limited to providing advice solely on their comapny’s own inventory of investment choices. If you had an account with both Company A and Company B, it would be highly unlikely that your advisor with Company A would recommend you invest in a fund from Company B, even if the fund in question was better performing, less expensive, and historically less risky than any of the funds your advisor at Company A had to offer. Even though the fund from Company B is in your best interest, your advisor at Company A would not be obligated to offer it to you.

Furthermore, in the case of a broker, the agents actually have a fiduciary duty to their employing broker – not to their clients. Thus, many of the individuals involved in helping clients select their retirement investments are held to a more lenient “suitability standard.”

The suitability standard requires only that investments must meet the client’s investing objectives, time horizon and experience. It does not require that the advisor put the client’s interests above his or her own. So in this scenario, it is perfectly fine for the advisor to put the client into an investment that costs more and pays higher commissions to the advisor – even if there is a comparable one that costs the client less.

That’s not to say that these individuals are untrustworthy – it’s just the nature of the business they’re in. Unless industry-wide reform takes place, there will always be a clear and present conflict of interest for those who represent companies that sell investment products. The best defense against any possible misdeed is an informed consumer.

University Retirement Plans

One of the many advantages of being a university employee is the access to great vendors that administer university retirement plans. There are many vendors incorporated into university retirement plans like TIAA, Fidelity, and Vanguard being some of the most common. These custodians offer a great low-cost investment platform and also offer unique investment opportunities you cannot get outside of these plans. Many of these companies will also have advisors who can help give you advice on investments and retirement planning. 

As good as these vendors are there are several questions to consider. These vendors are motivated to custody assets the same way as investment brokers are outside of the university. In order to incorporate all of your assets in their planning, they may encourage you to consolidate all assets with them. Often times this might not be in your best interest, as each vendor has unique strengths and opportunities. It is important to understand what those are before considering any consolidation. 

Who Can You Trust?

An independent, fiduciary adviser is what consumers should be looking for. Additionally, seek out an individual who is well-experienced and highly credentialed. To be a fiduciary is to put the client’s needs above their own, but to be credentialed (ex: CERTIFIED FINANCIAL PLANNER™) means they will have in-depth knowledge of the laws, rules, and strategies of comprehensive financial planning that can make an impact on your financial future.

When looking for an independent adviser, seek an individual who is paid directly by the client, does not work for a firm that sells investment products, and who does not receive compensation from another source. If an advisor is paid by their employing firm or by an affiliated broker in the form of a commission, it stands to reason that he or she may be motivated to sell investment products that generate higher commissions. Furthermore, they may be limited to their employing firm’s or affiliated broker’s investment choices, when more advantageous investments may be found elsewhere. 

If you are already working with an advisor, simply ask if he or she is going to represent you as a fiduciary, or instead if the advisor represents the financial company as a seller. There is no middle ground. The advisor either represents the client as a buyer’s agent, or a product provider as a seller’s agent. 

If your advisor is going to represent you in a fiduciary capacity, ask that he or she signs a Fiduciary Agreement as part of your relationship. Here is a sample agreement:

Fiduciary Agreement

• I will always put the client’s best interests first, ahead of my own & that of my firm. As defined by federal law, I will act as a fiduciary.
• When selecting investments, I will act as the client’s agent, selecting the best investments at the best prices, at all times.
• While neither I nor anyone else can promise superior investment returns, I will provide impartial advice, and act with skill, care, diligence and good judgment.
• I will provide full disclosure of all important facts and I will fully disclose and fairly manage unavoidable conflicts, in the client’s favor. 

Filbrandt Wealth Management is an independent registered investment advisory firm, and one of the country's leading experts in dealing with university retirement accounts. We’ve been serving our hundreds of clients as a fiduciary for decades, and will continue to do so.

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¹2018 Edelman Trust Barometer. (2018) Financial Services Edition. [PDF file]. Retrieved from https://www.edelman.com/sites/...