Most people know that something went wrong with our economy in 2007-08. Not many people understand the details, because trying to comprehend what a financial derivative is or does boggles the mind of even the financially savvy. (Thus our global meltdown).
There is one contributing factor, however, that was fairly straightforward: people with titles like “Financial Advisor” and “Broker” were able to offer ordinary investors financial advice without any legal obligation to serve as their fiduciaries.
Their what? Despite the fact that it has “douche” in the middle, a fiduciary is actually a good thing. A great thing, really. A fiduciary is someone who gives you the best advice for your situation, rather than acting to advance their own profits. Your accountant has a fiduciary responsibility to act in your best interest, for example. The financial advisor at your local bank, however, does not.
There is a long and aggravating history of how this divergent set of legal expectations came to exist, and if you want to learn more, you should read Helaine Olen’s Pound Foolish and John Bogle’s (quaint but financially accurate) Enough. But the important point for now is that financial advisors can line their pockets by directing you toward investments with higher commissions and fees, which depletes how much you earn on your investments.
This is harmful to all investors, but it is especially damaging for people who try to save for retirement. So it was an incredible victory when, last April, the Department of Labor issued a new rule, which legally requires anyone who advises on retirement investments to fulfill what ought to already be their moral obligation by acting in the best interest of their clients.
The incoming administration, however, has promised to eliminate this rule. There may be nothing we can do to stop them right now, but what you can do this week is make sure that the people in your life – your parents, siblings, cousins, friends, and co-workers, are aware of what the hell a fiduciary is, why it matters, and what they should ask when they turn to a banker, financial adviser, investment manager, or stockbroker for advice. These professionals may not be fiduciaries, but they are obligated to respond to customer questions. So if you ask, “Are you my fiduciary?” and they say, “No,” find someone who is a fiduciary to work with instead. If they say yes, get it in writing.
To help you begin the conversation (prime the pump), check out this one-pager, which we encourage you to print and share with the people in your network.