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Pragmatic Capitalism

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Can you be a Fiduciary Without the Best Low Cost Options?

Here’s some blockbuster news from AdvisorHub:

EXCLUSIVE: Morgan Stanley Purges Vanguard Mutual Funds

Wow. A brokerage firm purges the largest low cost fund manager on Earth from their platform. That’s amazing. This is like the food court in your local mall purging pizza.  Which is a pretty good analogy for what a brokerage firm is these days.

The big brokerage firms have armies of employees who work the food court. They provide access to the various vendors and advise the visitors on which vendor they should use. Vanguard is the most popular pizza vendor and they sell really tasty low priced pizza. Their consumers also don’t like to stuff their faces because they’re well informed about the high costs of eating too much. So they don’t come back that often. This is a bad deal for the brokerage firm who makes more money when people eat more and turnover their stomachs often. But they make even more money when they can direct their consumers into the vendors that they own. Those vendors tend to offer lower quality pizza at a higher price, but the brokerage firm makes more money which is good for them.  The food advisors make more money, the broker makes more money, etc. Everyone wins in this scenario. Except the customer.

While this is all good for the brokerage firm it puts the food advisors in a very very bad place. They know that Vanguard offers the best pizza at the best price. Recommending their pizza is the obvious choice in most cases because it’s good for the customer and that keeps the customer coming back even if it means lower revenues than the higher cost alternatives. So, when you kick out the lowest cost option it removes the advisor’s ability to be a true fiduciary.

In my opinion, in order to be a good financial advisor I MUST have options. I have to be able to peruse all the food menus so I can find the options that are most suitable to meet my client’s needs. One of the great things about being an independent advisor is that I can and do look at all the menus. I use Schwab and Vanguard funds almost exclusively in my business, but not because I feel beholden to them, but because I genuinely believe that they are the best products for my clients. If someone else came along offering better products I can switch without even batting an eye lash. It’s got nothing to do with how much I make because my firm’s revenues don’t conflict with which product vendors I choose. And without these low cost options I don’t think I could say I am a fiduciary because the food court has removed the food options that are actually in the best interest of my clients.

 

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Cullen Roche

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