Information asymmetry is one of the biggest contributing factors to financial mishap. In the financial services sector, structure and incentive compound this information gap. The word “Fiduciary” often gets thrown around as the Fiduciary Ruling was one of the most hotly debated topics in finance. Unfortunately, back in June of 2018, the U.S. Fifth Circuit Court of Appeals officially vacated the rule.
In the realm of financial planning or wealth management, I am absolutely appalled that I still see financial products being sold to uneducated consumers. The financial professional, typically a representative of someone like northwestern mutual, or an independent broker-dealer rep of say, an LPL, or some “hybrid” character who can “ACT” in a Fiduciary Capacity if he so chooses. My favorite is this “hybrid” Fiduciary/Commision Rep depending on how his pipeline looks in regard to the family’s monthly expenses. On the 1st of the month, the prospect getting referred in is going to get the Fiduciary treatment because the sales rep does want to act with Integrity deep down, but the poor bastard who came in close to the end of the month, different story. Kids are in college and those tuition bills are steep, the business was slow all month, BUT, I can sell an annuity for a 7% commission and pay the next bill… Let me just show this guy how an annuity can help him achieve his financial dreams.
This happens ALL the time!!! In fact, I just met with a college graduate who passed the bar exam, who has law school debt, is single with no kids. The first financial investment he owned was no better than your classic whole life insurance as an investment plan. I wish I can oust the guy who sold it to him, he was a CFP too! Bottom line, even smart people can get duped by professionals with credentials. Structure and incentive are supreme to anything else.
Moving on here – Fiduciary – something that could and really should be industry agnostic. Sorry to piss off my realtor friends here, but do buyer’s agents truly have the client’s best interest at heart? You are probably aware, but a buyer’s agent is paid from the person selling the home. Client’s don’t mind hiring the buyer’s agent because it doesn’t come out of their pocket and the buyer’s agent doesn’t care about the seller’s net check. What could go wrong here? Well — Does the buyer’s agent sit down with their client and figure out what their home means to them? What do they use it for? Do they entertain? Do they want to reduce their commute? Do they just want a lower payment than their rent so they can build equity over time? Are they just buying to get into a different school district? Is it an ego purchase? Keep up with the Jones’ probably.
OR is their incentive to try and have their client buy the most home they can “afford” to put leverage on so that their 3% commission gets nice and fat? I have heard agents say, “what’s your budget” and then they get their client pre-qualified for the max loan. This conflict of interest is the number one reason why Fiduciary Advisors should be highly regarded.
Let your Fiduciary be the bad guy. Let them evaluate what your true financial life goals are. How does purchasing your first home, or upsizing to your next home fit into your long-term picture? Hit subscribe for more cynical education in your inbox.
Athanassios Panagiotakopoulos is an Investment Advisor Representative with Dynamic Wealth Advisors dba Life Managed. All investment advisory services are offered through Dynamic Wealth Advisors.