Fiduciary Is No Guarantee

The politicians and proponents of a full-time fiduciary standard want to believe that once the advisor is required to put your interests first, you're home free, and you can say goodbye to rogues, crooks, and bad guys.

Bzzzzzzt. Wrong answer.

No matter what supporters say, the fiduciary standard is no guarantee of competency, nor is it an ironclad promise that the advisor's ethics and morals will never waver. Congress will never be able to mandate an ethical standard that keeps an advisor out of personal financial troubles and stops him from becoming so desperate that he dips into client funds or cooks up a scheme to surreptitiously "borrow" client money to get through a rough patch.

Smart Investor Tip

... the fiduciary standard is no guarantee of competency, nor is it an ironclad promise that the advisor's ethics and morals will never waver.

In fact, in the most recent statistics from arbitration cases conducted by the National Association of Securities Dealers, "breach of fiduciary duty" was cited as a problem in nearly one-quarter of all arbitration cases.
Most of those alleged breaches were conflicts of interest, rather than theft or fraud, but the point is the same; just because someone has a fiduciary duty doesn't mean he'll actually do it. (Interestingly, "unsuitability" of investments was cited in about half as many cases as breached fiduciary responsibilities.)

The high bar set by assuming a fiduciary role makes a client's job easier -- because it should stand out to you pretty quickly if your advisor's actions are not in your best interest -- but if your advisor "goes bad," the standard itself won't protect you, nor will it get your money back.

Fiduciary or not, there will never be a substitute for your own due diligence in making sure that your interests are properly served by every advisor you work with.

Key Points

  • Most advisors live by a suitability standard, meaning they must provide advice that's appropriate. You want what's best. There's real dollars in the difference.
  • No matter the advisor's standard, your standard should be that no one gets your trust just because he has a title and an office. Fiduciary standard or not, if he can't prove to you that he is on your side and has your best interests at heart, he's not likely to be an advisor you can work with for a lifetime.
  • If the government requires a fiduciary standard, that will make it clear where an advisor's interests are supposed to be, but it's no guarantee of how he will actually treat you. Moreover, don't expect the government to get this issue right; the bill proposals have enough loopholes that "increased protection" might be more lip service than reality.
By Chuck Jaffe
Chuck Jaffe is a senior columnist and host of two weekly podcasts at MarkWatch. He has also been a guest speaker on several television and radio shows.

Copyrighted 2020. Content published with author's permission.

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