How to tell a fiduciary from a salesman

Posted by Robin Powell on May 23, 2016

The most important thing to ascertain when choosing an adviser is whether or not he or she is a fiduciary. Will they put your interests first, at all times, even when it’s not in their own interests to do so?

But how do you tell a fiduciary from someone who’s not? The problem is, many advisers will claim to be fiduciaries when they’re not. If you’re in any doubt whatsoever, try asking them this question:

“If I told you there may be times when I disagree with your advice and will want to disregard it, would you still be happy to have me as a client?”

Sadly, much of the investing industry is built on the old adage, “If the ducks quack, feed them”; or, if that’s what customers want, give it to them. You see it with fund providers all the time. For example, investors have been in love with ETFs for a couple of years now, so what do the fund houses do? They bring out so many weird and wonderful ETFs that investors are completely overwhelmed by the choice on offer.

Large sections of the financial media are the same. Most readers don’t want to know about boring old index funds. They’d much rather know the latest hot stocks and sectors or the “star” fund managers who can help them make a quick killing.

Alas, there are advisers, too, who would rather give their clients what they want than risk losing the custom they provide. Joshua Brown, aka The Reformed Broker, has written two cracking articles in recent days which address this very question. They’re entitled “Give ’em what they want” and Saying No to the Validators, and I can’t recommend them highly enough.

In the first article, Brown explains how investors tend to find the evidence-based approach less appealing in times like these, when stock markets have spent several months making little, if any, progress. The major US indices, for example, are all several percentage points down on this time last year.

“Sitting still,” says Brown, “isn’t easy when there doesn’t seem to be any money being made for a prolonged period of time. Investors forget that what usually works doesn’t work all the time. They’re obsessed with finding a strategy that’s working right now. I don’t care what it costs, anything but this.

“Advisers will succumb and go looking for oil to quiet those squeaks. They will find snake oil and apply it liberally. This is the easy thing to do. ‘Give ’em what they want’ is the paramount rule of salesmanship, not ‘make sure they understand what they need,’ which is much harder to pull off.”

In the second article Brown refers to new research which shows that an increasing number of investors are using advisers as little more than validators — in other words, they want to make their own decisions but still have access to an adviser for support and as a sounding board.

“I don’t consider this kind of relationship to be advice,” says Brown. “It’s the kind of relationship I used to have as a broker to high net worth speculators and, in the end, it doesn’t work.”

I completely agree. How can an adviser seriously claim that their clients’ interests are paramount when they’re willing to take their money for rubber-stamping decisions which, the evidence overwhelmingly shows, are likely to leave those clients with lower net returns when they come to retire?

A genuine fiduciary will refuse to operate on that basis. To quote Brown again:

“The only way to build a scalable, sustainable and valuable investment advice practice is to demand that your advice is actually adhered to. Turning clients down who cannot accept that is a must. This is not about being a snob, it’s about only taking on work where you’re adding value.”

As a business owner myself, I know how hard it is to turn business away, especially when your firm is still new and small, when cashflow is a constant challenge. But there are professions where it’s essential, and financial advice is one of them. It’s about more than professionalism. It’s about ethical conduct. It’s about being true and fair — to yourself, your business and what you stand for, as much as to your clients.
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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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