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Fiduciary Controversy: Capitalism At Work

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Hey Cullen,

Given your definition of the fiduciary controversy as “Too many finance professionals sell people what they want rather than selling people what they need,” how would you respond to the notion that this problem is inherent to free market capitalism?

That statement could be made about almost any industry: there are too many greedy salesmen willing to sell people what they want, rather than what the people might need. If a person wants to buy a used car at a horrible value off the used car lot, they are free to do so. But if a person wants to dig down into the details and find the best value car available to them, they are free to do that as well.

At the end of the day, free market capitalism kind of guarantees people the freedom to be stupid with their money if they want to be.

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Posted by Erestor
Posted on 05/09/2017 10:10 AM
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True, people are free to do what they want. People can do lots of things that are bad for them that they know are bad for them. We shouldn’t ban things just because they’re bad for people. But this also doesn’t mean that people are allowed to deceive other people. So, for instance, we know that most high fee alpha chasing funds fail to beat their indices. It’s your option to buy that high fee fund if you want, but a good fiduciary will tell you the truth there. They will tell you that the odds of beating the index are very low and that you’re likely to be better off with the low fee fund. So yeah, people can still choose the high fee fund, but when you work with a real fiduciary you should get an honest opinion about what’s likely in your best interest. In other words, you hire a fiduciary because you know you’re probably stupid with your money and you rely on him/her to make sure you stop that behavior. So when they magnify it for their own benefit they are more like a scam artist than a capitalist.

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Cullen Roche Posted by Cullen Roche
Answered on 05/09/2017 12:34 PM
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    @Erestor: I had the same thought about the sickcare industry upon reading that post. It really is amazing that capitalism even works to provide better outcomes for everyone given that you’re not guaranteed to get a just outcome in any voluntary exchange. I suspect that us because capitalism involves such broadband divisions of labor, we all come out ahead collectively even if some labors are inherently exploitative. 1%-2% a year in world of competition is just not enough of a scam to be net deflationary to society overall. Government on the other hand…

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    Posted by MachineGhost
    Answered on 05/09/2017 10:56 PM
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      P.S. I support the fiduciary standard that Trump has delayed. Is that interventionism? Yep, sure is and it will have unintended consequences, but frankly, too bad. Far too many advisors don’t do shit and earn 1%-2% a year off of hundreds if not thousands of clients and live a lavish lifestyle. How does capitalism fully work in that instance when the consumer is ongoingly stupid? So sometimes a little help is needed.

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      Posted by MachineGhost
      Answered on 05/09/2017 11:00 PM
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        The wire houses (Merrill, Morgan Stanley, etc.) and many other independent advisory firms have been trying to grow their fee-based assets for many years.

        Cullen is right to question the value provided to a client when they’re being charged 1-2% for little or nothing beyond asset management. The thing is, it seems that most (or at least many) firms are trying to push every client in to a fee-based account. I submit that fee-based accounts are not the best choice for every client or for all of every client’s portfolio(s).

        Researcher Morningstar was recently quoted in the WSJ saying that “fee-based accounts can yield as much as 50% more revenue than commission accounts.”

        We can take Morningstar’s number with a grain of salt, but I stand by my opinion that fee-based accounts are not the best option in every situation. The DOL Fiduciary rule (as it’s written) may end up doing more harm – meaning costing investors more money – than estimated by the bureaucrats and politicians advocating for the rule.

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        Posted by Steve W
        Answered on 05/10/2017 10:43 AM
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          @MachineGhost Working in a wire house-style firm, I’ve been able to see the DOL rule first hand. The intent is good, but the effect is going to be devastating to those who the rule is designed to protect. We’re essentially being forced to kick our lower-level clients to the curb because the amount of overhead required to maintain a single account is no longer worth it for clients with less than, say, $250,000 in investment assets.

          Personally, I’d be in favor of higher fines and more stringent penalties, rather than reams and reams of new regulations. The number of regulations is going to force small accounts into automated investing platforms and only the wealthy will have access to one-on-one financial advisor relationships.

          Perhaps there are some highly automated RIAs out there that will be willing and able to scoop up these small accounts, but I think the screws are going to start tightening on a lot of RIAs too.

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          Posted by Erestor
          Answered on 05/10/2017 2:30 PM
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            Well, I suspect anyone that is too “poor” under the new rule to be serviced one and one by a human ought to quit being lazy and learn some financial intelligence. That is not a negative outcome in my book.

            And I think that also speaks to how much of a racket what is being promoted by advisors must be already if they could afford to service “poor” accounts. So again that’s not a negative outcome in my book.

            Don’t worry, people and the markets will adapt as they always do. Schwab is doing a great job… half-robo for the efficiencies and half-human for the hand-holding.

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            Posted by MachineGhost
            Answered on 05/10/2017 8:04 PM
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              The actual wording of the rule is mostly moot. Every financial adviser should be advising according to the est interests of his clients regardless of the amount of assets under advisement. This seems self-evident to me. It is unfortunate that we need regulations to push people to do right by others.

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              Posted by Lucas
              Answered on 05/18/2017 10:18 PM
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