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John Dorfman writes a syndicated column that appears weekly in the Omaha World Herald, the Pittsburgh Tribune Review and the web site Guru Focus. In it, he tries to provide original, profitable stock ideas for readers. In contrast to almost all other investment columnists, he systematically reports on past results, both good and bad.

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Investment Management and Fiduciary Responsibility

Tom Macpherson

It’s that wonderful old-fashioned idea that others come first and you come second. This was the whole ethic by which I was brought up”.

– Audrey Hepburn


Being a good fiduciary really isn’t that hard. But then again neither is investing. Yet it seems so difficult to find financial agents who truly believe their clients come first. Why is it so difficult to help your client maximize their returns and receive fair compensation for your services? Not sell them products they shouldn’t own, charge them too much, and line the pocket of the financial industry. Is that really too much to ask? Wait. Don’t answer that.”

– Ralph Dungan


Fiduciary Responsibility

 (This essay is based on an article that originally appeared on Guru Focus on December 28, 2016.   As of February 2017 it appears likely that the Department of Labor’s fiduciary rule will not be passed.)

One of the first things you have drilled into you as you prepare to take the examination for money-manager licensing is fiduciary responsibility. Under this theory you have to act with loyalty, prudence, and care, and act in the best interests of the client. The client’s interests must come first, yours second.

Another responsibility is “suitability.” It requires that as an advisor you avoid recommending unsuitable investments based on the customer’s general investment experience, level of investor sophistication, and risk tolerance. Traditionally, investment managers have been held to a fiduciary standard, while brokers were held only to the lesser standard of suitability.

Perhaps I’m old fashioned, but it would seem to me placing your client’s financial needs in front of your own must be a prerequisite to success. But this type of thinking is starry-eyed idealism in the eyes of many industry participants. Recently the Department of Labor proposed a Conflict of Interest Rule targeting (among other things) the all-too-common often practice of recommending unsuitable investment products to retirees[1]. The industry has responded in a manner that can only raise eyebrows. A typical response can be found in a recent article on InsuranceNewsNet.

“Investors should expect to see financial advisors stampede out of the market if fiduciary rules proposed by the U.S. Department of Labor (DOL) are adopted. That’s the view from industry lobbyists and executives representing insurance companies, broker/dealers, mutual funds and financial advisors”.[2]

Really? The idea that their own financial needs should be secondary to their clients might create a stampede of advisors for the exit door? If true, this is a sad statement about the career focus of many advisers.

A Family Example

An example of this targeted behavior is a series of recent transactions in my own family. A relative – aged 76 – has two trusts and an IRA of significant value. Her money – managed by a bank wealth management group – came with clear written instructions to avoid any investments of higher risk. In case this wasn’t clear, a document was drafted prohibiting several specific practices, including the use of leverage.  You can imagine our surprise when she showed me her statement and we saw not one but three funds investing in high yield debt instruments using at least 40% leverage.

Wondering how these selections came into her portfolio, one is likely to have several thoughts on the bank’s investment and asset management team.

  1. The team’s risk assessment group might be unclear that high debt instruments combined with leverage are higher risk in nature.
  2. The team’s portfolio management group might be unaware of the client’s specific requests related to risk.
  3. The bank’s client services team might not have the ability to communicate with the third party portfolio managers they’ve hired to reduce costs.
  4. The bank’s client management group, the bank’s senior management, and the third party investment group might care little – or know nothing – about fiduciary responsibility and the concept of “suitability”.
  5. The bank’s client management team, the bank’s senior management, and the third party investment group might have financial incentives to purchase these funds.

I have to be honest. None of these five choices give you a helluva lot of confidence that the bank and all its minions are very clear of their role as a fiduciary steward.  And this from a mid-sized financial institution holding itself out as “your partner in making your future possible”.

Why This Matters

It would seem that talk of wholesale resignations and departures (along with the $11M spent on Congressional lobbying) indicates the financial industry places little value on the need to address conflict of interest. But it should matter – vitally and passionately – to those who are financial stewards. Here’s why:

Investment Management Should Be A ProfessionNot An Industry

When the role of stewards is seen as an industry rather than a profession, the job will likely attract the wrong people. This is true in the health care industry, and in the financial industry as well.  As an investment advisor, I feel a deep sense of obligation to meet my client’s needs – the long-term growth of my client’s assets enabling them to meet their individual goals. By purchasing assets that do not meet the their goals, assuming risk that endangers their returns, or having relationships where my profits might be passed off to my client as an expense, I will have failed my fiduciary requirements as an investment advisor. If our clients do well, we will be compensated accordingly. My client’s accounts are not an asset to be used to fund my social proclivities, sate my financial desires, or creates business opportunities for accomplices in a fee sharing agreement.

Your Clients’ Returns Depend On It

As I’ve said many times, expensevs matter. A lot. Every penny that comes from returns is magnified over the life of the client returns. This should matter. Your client’s returns are based a good deal on how you can minimize costs. Making the future possible to any client should be the ultimate goal of an investment advisor. Placing them in high cost offerings, charging exorbitant fees, or placing your needs above theirs defeats the central purpose of the enterprise.

It’s Already There in Writing

Starting with the Public Utility Holding Company Act of 1935[3] through to the passage of the Investment Company Act and the Investment Advisers Act in 1940 (and far beyond), there has been an effort to assure that investment advisors place their client needs first. The proposed DoL regulations are simply further articulation of that concept. The fact that so many financial institutions are agonizing over this proposal is a sad commentary on how we currently see our role as fiduciary stewards.


I consider it an honor and a great responsibility when someone lets me manage their dearly earned savings. As a Registered Investment Advisor one’s role is to provide a client with best possible chance at achieving their financial goals.  Hard as it may seem to some members of the investment community, the ability to place the client’s needs before those of yours is the legal and ethical definition of investment management.  Perhaps it is time we call the bluff of so many of these individuals who claim the new rules will force them out of the investment management business. Over time their departure could be a net gain for both investors and our profession.

[1] The proposed changes can be read here: http://www.dol.gov/ebsa/regs/conflictsofinterest.html

[2] http://insurancenewsnet.com/innarticle/2015/08/28/would-advisors-abandon-the-market-over-fiduciary-rules.html

[3] This Act authorized the Securities and Exchange Commission (SEC) to study investment trusts after their extraordinary performance in the post-1929 Crash.

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