You think your life is tough? Try being a millennial.
Sure, they have most of their life ahead of them, but that’s just the problem – they have most of their life ahead of them. The problem with a virtually limitless future is that it requires an often intimidating amount of decisions to get there.
And with each decision we feel the onus of uncertainty. And as uncertainty grows, so does anxiety. And with greater anxiety, well, it’s no wonder millennials think legalizing marijuana is a good idea.
Retirement investing in the past: 'Ask no questions'
They say ignorance is bliss, and in the old days, young adults could mindlessly place their retirement funds with whomever gave them the best seats at their preferred sporting event. We didn’t have to worry about the inherent conflict-of-interest in all those freebies.
After all, that’s the way the financial services industry operated. And since it was so gosh darn hard to get into the nitty-gritty of what went on deep inside the internal operations of the financial products we bought (“very complicated,” was the most likely response we’d get), we never had a reason to believe our best interests weren’t the top priority.
Retirement investing in the present: Looking behind the curtain
Fast forward to 2016 and we have “fiduciary” and “conflict-of-interest” not only playing out on the battlefield of politics, but in the pop culture window broadcasting endlessly from our own living room (or convenient mobile device).
This is the world of today’s millennials. They live in times where the curtain has been withdrawn. They’re exposed to the ugly process of making sausage older generations could have easily avoided.
You think your life is tough? Try being a millennial.
So, when it comes to understanding the meaning of “fiduciary,” we can turn to the industry and get the correct (albeit ignored or not understood) answers, or we can turn to the generation asking the question.
That’s what I did recently, and it might just surprise you to discover just who the millennials learn the most from when it comes to financial issues (see “Why are Millennials Suddenly So Interested in What Fiduciary’ Means?” FiduciaryNews.com, October 11, 2016).
When it comes right down to it, millennials ask some very profound questions (that their older brothers and sisters might want to consider asking, too).
Here are 5 questions the millennials I interviewed asked and a modest attempt to answer them (realizing I’m in the very industry they least trust to provide the correct answer… to anything).
Question #1: Why are fiduciaries obligated to act in your best interest, but other financial advisors aren’t?
Answer: This is a great question and it gets to the heart of the matter. If you go to a doctor, you know that person has gone through a rigorous training program and is obligated to abide by the Hippocratic Oath (popularly interpreted as “first do no harm”) – the medical equivalent of the financial industry’s fiduciary standard.
You’re confident the doctor will only prescribe medicine that you need and that won’t harm you. On the other hand, you see tons of TV commercials advertising medicine. These are the drug makers promoting their product. Who would you trust when you want to know which medicine to take – the doctor or the drug maker?
Of course it’s the doctor. That doesn’t mean we don’t need drug makers – we do, otherwise who would make the drugs that doctors would prescribe?
Now, imagine a world that allows doctors to make drugs and drug makers to prescribe them. That’s the state of the financial services industry today.
We need both advisers and product creators. We just don’t need them doing both at the same time. That’s what the DOL’s new conflict-of-interest (aka“fiduciary”) rule is all about. Unfortunately, it doesn’t out outlaw those conflicts-of-interest, so it remains caveat emptor for those seeking financial advice.
Question #2: Do they have a credential program of some sort that differentiates them from the ‘average’ financial advisor?
Answer: So, here’s the thing. The way you asked the question reveals the problem.
But first, the financial service industry is replete with any number of certification programs. Many are given by organizations that promote the fiduciary standard. Some of those organizations will strip you of those credentials if you’re found to have violated the fiduciary practices as defined by that particular organization.
Did you catch that? Terms like “fiduciary duty” and “best interest” are quite subjective. Since we don’t have a legal definition of a Universal Fiduciary Standard, pretty much there’s a lot of latitude in what’s “fiduciary” and what’s not.
Now, about that ironic revelation contained in your question… There are currently only two types of service providers that are legally bound to abide the fiduciary standard: SEC Registered Investment Advisers and Trustees (usually from a bank, but not always).
Setting aside the bankers for a moment, look at the spelling of “advisers” in that SEC title. Now, compare it to the “advisor” you used in your question. Here’s the difference, if you call yourself an “adviser,” you must always act in a fiduciary capacity. If you call yourself an “advisor,” then acting as a fiduciary is optional. Once again, if you looking for a fiduciary, caveat emptor.
Question#3: What if you ask your financial advisor if they are a fiduciary and they are not?
Answer: Technically, that doesn’t mean they won’t act in your best interest. For that matter, there’s nothing that guarantees a fiduciary will act in your best interest (e.g., convicted fraudster Bernard Madoff was a fiduciary).
The difference is this: A fiduciary that doesn’t act in your best interest can get in real legal trouble. A non-fiduciary who does the same thing? Meh. In case you’re not paying attention, caveat emptor.
Question #4: What's a good resource to use to find a reputable fiduciary in my area, or what financial planning services from a fiduciary will end up costing me?
Answer: Believe it or not, you just entered the Twilight Zone. Hmm, not familiar with Rod Serling, eh? Perhaps it’s best to think of it as finding your neighborhood brimming with Paranormal Activity.
You see, your question initiates a circular reasoning created by the DOL’s new fiduciary rule. Believe it or not, despite all the headlines about high fees, paying low fees may not be in your best interest.
So, the correct question isn’t “how much will it cost?” but “What value do I get in return for my fee?” (You can guess what that means: caveat emptor.)
But its gets more complicated. You see, recommending a fiduciary is a fiduciary act. Ouch.
You may find people and even organizations willing to make such recommendations. When this happens, you need to ask yourself “What is their angle?” Why are they recommending this particular person? Is it because they’re a member of the group making the recommendation? Is there another relationship between the two you’re not aware of?
For what it’s worth, the DOL’s new rule appears to make referral fees – the idea that you can get paid for referring someone to a client – problematic. That doesn’t mean there won’t be referrals. It just means caveat emptor.
Question #5: What options do you have, if any, to look out for your own best interests while planning for retirement?
Answer: Now you’re beginning to understand. In case you slept during Latin class, “caveat emptor” means “buyer beware.”
Ultimately, it’s your own responsibility to look out for yourself. Remember, when you go to a doctor, sometimes you want to get a second opinion – but that decision is on your shoulders.