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Why Bother to Act In a Client's Best Interest?
The cornerstone for a client relationship in the asset management business is trust. There is no substitute for candid and transparent advice. We at New Market Wealth Management, are disappointed in President Trump's decision to delay or roll back the so-called Fiduciary Rule which requires all financial professionals who work with retirement plans or provide retirement planning advice, to act as Fiduciaries*. To us, the industry's fight to repeal the Department of Labor (DOL) requirement is very telling. First, let's review
the DOL Fiduciary Rule, which is now at risk of being reversed.
Investment professionals and firms must:
- Put their client's best interest first,
- Act with prudence ---- the skill, diligence and good judgement of a professional,
- Not mislead clients; provide full and fair disclosure of all important facts,
- Avoid conflicts of interest,
- Fully disclose and fairly manage, in the client's favor, unavoidable conflicts.
This standard, and these operating requirements, are not complicated. Frankly, to us, there are two obvious questions:
- Why would any firm have a problem agreeing to comply with these basic requirements?
- Why on earth would any investor ever hire a firm that did not agree to these requirements?
The answer to question #1 is easy and obvious: money. The cost to give fiduciary-level advice will be an expensive adjustment; not just from added legal and compliance costs, but more importantly from lost commission revenue. Remember, currently a broker is free to recommend Investment A or Investment B based on whichever option pays the broker the greatest commission, so long as they are both 'suitable' options. You can guess which investment gets recommended the most often.
Research firm, A.T. Kearney, estimates that the cost to the industry to adopt Fiduciary standards would be approximately $20 billion. No wonder why the industry is fighting to repeal the law. They clearly would prefer to allow conflicts of interest, keep those commissions, and make their clients figure out if there is any abuse. History is full of poor outcomes when people and firms in the asset management industry police themselves.
The answer to the second question is not so obvious. Investors are human. If they don't see the infraction they won't necessarily go looking for one. Studies suggest that a majority of investors may suspect impropriety from "the firm, bank or brokerage company" they work with while believing that their personal investment advisor at that very firm, is someone to be "trusted".
What ultimately happens with the Fiduciary Rule remains to be seen, but investors don't have to wait to protect themselves. Today, financial details including all the ways a firm makes money, potential conflicts of interest, revenue sharing and commission details are contained in the firm's ADV II, also called their Disclosure Document. Every investment firm must provide their ADV II to each client. If you look carefully, this document is a treasure trove of information. We encourage all investors to read their Advisor's Disclosure Document, and we're happy to help you decipher the legalese. We've attached ours here. We're proud of the fact that we are a fee-only Fiduciary, fully transparent on how we are compensated, who has always put our client's interests first.
*The Department of Labor's definition of a fiduciary demands that advisors act in the best interests of their clients, and to put their clients' interests above their own. It leaves no room for advisors to conceal any potential
conflict of interest, and states that all fees and commissions must be clearly disclosed in dollar form to clients. Previously, only advisors who were charging a fee for service (either hourly or as a percentage of account holdings) on retirement plans were considered fiduciaries by the Department of Labor.
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Volatility aside, the major equity benchmarks ended last week mostly flat. The week started with a widespread sell-off as Wall Street appeared to focus on the political environment--Trump's immigration ban and subsequent firing of the acting attorney general. However, as the week progressed, attention turned back to earnings reports, which solidly outpaced expectations, and economic factors including positive news on both jobs and payroll.
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> US Job Market: Last Friday the US Department of Labor released its latest Employment Situation report. In very positive news, payroll growth in January exceeded expectations, rising 227,000 for the best showing since September and well above the 2016 average of 187,000. One area of strength was construction where
spending has been improving with the sector adding a very strong 36,000 jobs in the month. The unemployment rate ticked up one tenth of a point but remains low at 4.8%.
> Weakness in February: February may be the shortest month of the year, but it also tends to be a month of stock market corrections, especially during a post-election year. Since 1950, the month of February has gained just 0.03% on average and risen only 55% of the time. Looking only at post-election years, the S&P 500 loses 1.8% on average in February, making it the weakest month of the year.
> A Closer Look at NAFTA:
NAFTA's history is one of both bi-partisanship and deep-seated rancor. The agreement has been successful at increasing trade between all three countries. On balance, total US trade with Mexico and Canada has expanded by 40% over the past 25 years as a percent of GDP. NAFTA remains controversial because its positive and negative impacts are not distributed evenly; some industries and regions have suffered as a result. In the 10 years after NAFTA (1994-2004), US manufacturing jobs decreased by 17%. But over that same time period, the average manufacturing wage moved 34% higher.
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we provide institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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