I’m still hung up on the fiduciary standard because, according to my inbox, this is actually a controversial topic. So, let’s try this again.
If I had to summarize the fiduciary problem in finance it would be this:
Too many finance professionals sell people what they want rather than selling people what they need.
When you walk into the doctors office you have certain expectations. You expect that the doctor will fix you by doing certain things. But the doctor will not necessarily give you everything you want. You might want 10 million vicodins, but the doctor will only give you 10. In this sense, the doctor is looking out for your best interests. They are giving you what you need rather than what you want.
When you walk into your financial adviser’s office you have certain expectations. You expect that the adviser is doing certain things that will maximize your financial health. But there is a problem here. Too many financial professionals operate by giving you what you want rather than giving you what you need. For instance, you might want high returns with little risk. Some finance professionals will prescribe a product that purports to do something like this. That product, of course, is very expensive and will generally fail to achieve its desired results. So, by giving you what you want rather than giving you what you need the financial professional ends up selling a product that is not in your best interests.
When you walk onto a car sales lot you probably have certain expectations of what you need. You probably only need the Honda Accord, but the car salesman is motivated to sell you the Ferrari. You don’t need the Ferrari, but you want the Ferrari. In finance, the Ferrari usually turns out to be a lemon. That is, you overpaid for something that doesn’t do what it was advertised to do. So, there’s a conflict there that is not entirely the fault of the sales person. They are just trying to give you what you want. But it is the fiduciary responsibility of the financial professional to know their client well enough to give them what they need rather than what they want.
I always tell my clients that I will build them the appropriate portfolio and not the optimal portfolio. In doing so I am giving people what they need rather than what they want. This is what it means to be a fiduciary in finance. It is about making the difficult decision to forgo higher profits in the pursuit of doing what is right. And that means giving people what they need rather than what they want.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He 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.