What is a Fiduciary?

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Transcript

Mike:

Basically what you’re doing is you’re saying I’m going to go ahead, put my life’s future in the hands of someone who’s a really nice guy, but he also doesn’t put my interests first.

Zach:

Right.

Zach:

Welcome to the retirement today podcast. My name is Zach Holcomb and alongside me, we have Michael Reese. He’s a certified financial planner and president and founder of Centennial Advisors. If you’re listening to us on our show, happy to have you along with us, but if you’re watching this on our YouTube channel, remember if you want closed captions, you can click the button indicated below. And as always, we’d love to have you subscribe, to get notified about all of our latest content and videos. You can click the big red subscribe button below. That’s also indicated here. Mike, I’m super happy about today’s show. We have a really exciting topic, but I’m also pumped about our brand new setup again, right?

Mike:

Yeah. I love this. Uh as you can imagine, we are doing our best to continue to improve our visual set. You know, we want to be, at least semi-professional here. Right. but and I, I noticed, so you forgot, we’ve got the subscribe button below, but don’t forget to Zach. If people like this, they should hit the like button and like, they should share this with their friends. If it’s a topic that they think it would be helpful with their friends. Right?

Zach:

Yeah, absolutely.

Mike:

Okay, fantastic. So this week I got a great topic, by the way, you’re gonna love this, you guys we are going to talk about the question we get all the time. Sure. So in fact, last night we were doing one of those dinner events where you know, where I, people come in, we get dinner,

Zach:

A real live event?

Mike:

Yes. We actually had real people. It was crazy. Anyway, as I go around the tables asking questions at two different tables, I got the same question. And the question was, are you a fiduciary?

Zach:

Yep. I remember that.

Mike:

And I thought to myself, you know what, that probably be a good topic for the show. And I also thought I really believe that a lot of people, they hear that word fiduciary. I’m not sure they really understand what it means. So why don’t we start there? What does it mean to be a true fiduciary? Zach, I’m curious, you were making fun of me last night for being old. Here’s my question for you. So now it’s my turn to see if I can flip this table a little bit, put me on the spot or put on the spot from your perspective, how would you define a fiduciary?

Zach:

Well, from my perspective, and I had a lot of conversations, you know, with prospective clients and people that are interested in our services. And this is a question I receive quite often. And from my perspective, a fiduciary is somebody that’s working in your best interest and not in the best interest of the advisor. Client always comes first.

Mike:

Okay. Client comes first. I liked that. By the way, I think the technical definition is something like a fiduciary is someone who has the legal, moral, and ethical responsibility to give you advice that is in your best interests and to disclose any potential conflicts of interest. So that’s the technical definition. I believe that are close to that, right? The way you said it, I think is much cleaner. It’s like, Hey, a fiduciary is someone that focuses on what’s best for you without worrying about what’s best for them.

Zach:

Right. And I think the issue is you only say this, it sounds like every advisor should be doing that, but unfortunately that’s not the case.

Mike:

Yeah. So here’s the deal. Every financial advisor out there, they want you to believe, right. That they’re a fiduciary, right? So here’s another question for you. What percentage of financial advisors are truly fiduciaries?

Zach:

I’m going to say it’s less than 10%.

Mike:

You must’ve been listening to me talk. It is less than 10%, less than 10%. And by the way, so how do you tell, how do you tell if someone’s truly a fiduciary? Well, here’s number one way to know that they’re not a fiduciary. Number one way to know they’re not a fiduciary is they work for a really big firm and you know who they are. They’re a national firm got a big name. And I mean, you know, the companies, right? I can’t, I probably shouldn’t say their names,

Zach:

Big buildings, name on the door,

Mike:

On every street corner. You know, if that’s the, if your advisor works with a large firm, I don’t care how much they say that they’re fiduciary, they’re not because they, that the problem here is that their primary obligation is for the firm that they work with. So if they work for ABC Brokerage house, right. If that’s who they work for then they’re not a fiduciary. It’s kind of like here, I can say this, I think as an example. So we have we custodian our assets at Fidelity and TD Ameritrade. And if you talk to the, you know, if you talk to those institutions maybe Vanguard’s another one where you talk those institutions and you work with an advisor at one of those institutions, they want to say their fiduciaries, but here’s the problem who writes their check,

Zach:

ABC Brokerage.

Mike:

Yeah. Whoever the company they work for, right? And if so, so if that’s who writes their check and the company that writes their checks says, Hey, I want to make sure when you set up your clients that you use this preferred group of funds to put in your client accounts right away, that’s what they’re going to do is that what’s best for, you know, that’s, what’s best for the company, right? They’re not going to be fiduciaries. If you want a fiduciary, you must, you only find them at the independent firms. That’s the only place you find them. So the other, this is kind of one of my pet peeves. So you ready for this?

Zach:

You gonna get fired up?

Mike:

One of my pet peeves is this. It’s like people go around and say, I’m a fiduciary. Right? And then you find out that the only thing they do are insurance or investments. So I’ll give you a good example here. There’s a big company there’s out of California Fischer investments, right? It company, Ken Fischer writes for, I think Forbes, right? They do investment management, that is what they do.

Zach:

That’s their wheelhouse, that’s all, they focus on

Mike:

Call themselves fiduciaries. Now technically for what they do, they kind of fit in the definition of fiduciary.

Zach:

But it’s not, we’re not talking about kind of, we want to be full on fiduciary, full picture. Yeah.

Mike:

So here’s, here’s an example. All they do is investing, right? What if you need insurance?

Zach:

Can’t get it at Fischer.

Mike:

Yeah. Not only can you not get insurance at Fischer, they actually, because it’s against their best interests to help you get insurance. Because if you want to put money in say an annuity at an insurance company or into life insurance. That means you’re taking money away from them. Is that in their best interests?

Zach:

Not as the company, no.

Mike:

And in fact, they’re very active at telling you why you shouldn’t do that. They don’t even care if it’s in your best interest or not, it’s against their best interest. So is that really being a fiduciary?

Zach:

Does it sound like a fiduciary to me.

Mike:

I don’t think so. So I think that if you want to talk to a true fiduciary, here’s what I think here are the characteristics that a true fiduciary you know, what they have, what would encompasses a true fiduciary, number one, they can help you with all kinds of investments. Whether it’s investing in the markets, whether it’s investing with insurance companies, they don’t care. They can do everything. Right. That’s really important because if they can do everything, they aren’t going to care. You know, you know how they’re compensated doesn’t matter anymore. Right? They don’t care because they’re saying, look, our job is help you. And we don’t care what tool we’re using. We’re just going to help you. So that’s number one. Number two, I believe a true fiduciary should be compensated or had the ability to be compensated in different ways. How about that?

Zach:

Sounds pretty good.

Mike:

Well, a lot of people, if you read about fiduciary is how they’re compensated. A lot of the articles say, they’re all fee-based right. Well, wait a minute. Insurance companies mostly pay commissions. If having some money with an insurance company is the right idea. The best idea for you. Well, don’t you want your advisor to tell you that?

Zach:

Yeah. 100%.

Mike:

And don’t you want them to be in a position where they don’t care if you do managed accounts or insurance accounts, I mean, they’re compensated either way, right?

Zach:

So in the end, what you’re saying is it doesn’t matter how the advisor’s compensated in this case, as long as it’s in the client’s best interests.

Mike:

Exactly. There are situations where commissions are actually better for the client. Other situations where fees are better. Here’s another one, true fiduciaries should also provide, like, if you want to work with them, but you want to manage your own money. You want to do all that yourself. They should also provide some kind of a, like an engagement fee, like a, you know, like, you know, attorneys have these retainer fees. True fiduciary should have that as an option. Right? So the bottom line is you should be able to engage with them in a lot of different ways. And the reason for that is because a true fiduciary, their focus is not on how they’re getting paid. It’s on the client. Right. And they’re just trying to figure out how do I put together different ways that my client can engage with me so that it’s best for them. Sure. Not best for us best for them. So of course, you know, Zach, the reason we have this topic is because as you know, I was talking to this these folks and, you know, they were working with an advisor, one of these big firms. Sure. And they loved this person.

Zach:

Been working with them for years.

Mike:

They really, they really thought he was a great guy. And nevertheless, for whatever reason, they wanted me to do a double check in their portfolio. And I’m like, like, why you love your person? What do you want me to double check what you’re doing? You know, why are we doing this right. Well, we just want to make sure we’re not missing anything. And I made the mistake. What I normally say in that scenario is I was like, well, let’s say you are. I mean, you love this guy. You’re going to leave him. I mean, if he’s not giving you what you want, you leaving and you’re going to come over to us. Cause if I ask that question, that would have said, no, it didn’t matter. It didn’t matter what I said, they weren’t going to come over. So it’s like, why am I wasting my time?

Zach:

What are we even doing here?

Mike:

But because I’m sometimes not, you know, I don’t know why, but I just did it.

Zach:

You were in a good mood that day.

Mike:

Maybe that’s what it was anyway. So I run this report and here’s what I learned. You know, what revenue sharing is?

Zach:

I believe so.

Mike:

So, so what is your understanding of revenue sharing?

Zach:

So in this case, so the investments that the client was being put into, they were giving kickbacks to the company themselves.

Mike:

So here’s an example. If, if you work with any big firm, just type in the name of the big firm and then type in revenue sharing agreement. So if you were at Edward Jones, you’d say Edward Jones on Google, Edward Jones, revenue sharing agreement, Ameriprise, revenue, sharing agreement, Morgan Stanley revenue share, you know, whatever the company is. By the way, if you find a revenue sharing agreement on Google, you already know you’re not working with a fiduciary right away that right away, you’re not working with a fiduciary because revenue sharing is where the company here’s what happens. So the big company, they have all these fund families pay them money or kickbacks in order to be on their platform. So if I were a big company, I would go to say, American funds. I would go to Lord Abbott. I would go to Franklin Templeton, and I would say, Hey guys, if you want our advisors to put your funds in their client’s portfolios, you have to pay us money. Kickback. And so these companies say, sure, we’ll do that. And that gives him access to thousands and thousands of advisors, which is hundreds of thousands, if not millions of clients. So this, by the way is the absolute opposite of being a fiduciary because essentially what’s happening. If you work for one of those big firms, your firm is telling you, here are the funds. Here’s what they say, right? They’re so sneaky about it. They say, we’ve done the research. So Zach, if you were a client, I would say, Zach, we’ve done the research. And we have found that there’s a certain group of fund families, you know, and they’ve got long time management, they’ve got better returns. You know, they’ve beaten their benchmarks more often than not sure. So we’ve put together these managers and it’s like a preferred list right, of managers as well. So the big company actually did some work here to make sure that these managers or these fund families were truly like the best right out there.

Zach:

I like when you say preferred lists, because it’s really preferred for the company, not for the clients.

Mike:

Exactly it. So the reality is at no point, are they considering what’s best for the client here! They’re only thinking about how do we get as much money as possible from our clients. That’s what that’s all they care about. So they put together this list, they go to the advisors and they say, all right, advisors, we’ve done the research and the advisor, not knowing any different says, okay, I’ll put you in, in those funds. Our company’s done the research. Here’s why you should use these fund. I have spoken to a lot of investment advisors who are true fiduciaries. It’s amazing Zach, how, when they actually want fillers to find what fund is best for a client. Like if you want large company stock, what’s best for that. What position, what tools should you use? And it might be the S and P 500 index, which is free. That’d be free to you. You could own the large companies for free. Does that sound good?

Zach:

Sounds like a great deal.

Mike:

Okay. So at a big firm though, well, those kinds of funds don’t pay kickbacks. So what’s the fund company or the big firm, do they say, Oh no, no, no. We’re going to recommend that you put your money and say, let’s pick on American funds for a moment because American funds, there’s a lot of money in American funds out there. Zach, I’ve heard of a lot of fillers. Do you know how many times American funds comes up as the best fund to hold for the client?

Zach:

Let’s say more often than not.

Mike:

Never, ever, ever, never, ever, never does American funds never is that the best fundable, ever. So why in the world would a big firm say to you, Zach, I’m going to fill your portfolio with American funds.

Zach:

Kickbacks,

Mike:

Kickbacks. Is that what’s best for you?

Zach:

No.

Mike:

No. So is your advisor really working in your best interests?

Zach:

Absolutely not.

Mike:

Does that, so is your advisor a fiduciary?

Zach:

No.

Mike:

So if you like the guy, basically what you’re doing is you’re saying I’m going to go ahead, put my life’s future in the hands of someone who’s a really nice guy, but he also doesn’t put my interests first. Does that sound like a really good idea?

Zach:

That’s not a relationship I want to be in.

Mike:

I mean, and, and so that kind of thing just drives me crazy. Right, It just, I find it so offensive. And so what, and in this part, and then by the way, same couple, they were in a platform where the advisor was charging them an annual fee. And within the port and like call it 1% a year and everybody, and so I said, these people have like $3 million. Like, so how much are you paying this guy? What’s 1%, a year, $3 million. $30,000. Well, what does he do for $30,000 each year. Oh, he’s great. He calls us about, you know, a few times a year. We visit with them a couple of times a year. He’s great. Does he help you with your taxes? No. No, they don’t do that. They’re right. Well, what about your insurance? Like your low, do you need long-term care? Life insurance. Does he help you that now they don’t really do that. What are your wills and trusts at least? Oh yeah. He told me we should get that updated. Well, did he have somebody that could do it with you. I mean, like they send you to an attorney to get it done. Did he follow up? No, he just does investments. That’s fine. If that’s what they do, that’s what they do. Are those other areas important to you? Well, that’s why we’re here, Mike. I’m like well, but then when you dug deeper, on the 30,000, he was charging them, inside the portfolio is a bunch of mutual funds. And when you look at the internal fees there, it was something like 0.92%, it’s almost 1%, right? There’s another 30,000 going out to other advisors. So the advisors giving 30 and the visor put them in these different funds where the client’s paying another 30 that’s hidden, of course, every one of those funds were on the revenue sharing list with the firm. So what do we got the clients get in double dip. They weren’t paying 30,000 a year. They were paying 60,000 a year.

Zach:

That’s a lot of money to pay, to not work with a fiduciary.

Mike:

And I asked him, I said, how you been with this guy? How long? 20 years. Okay. So you’ve been paying him 2% the whole time, which is, you know, you started with maybe a million, grew to 3 million. Let’s say it’s 2 million on average, on average paying about 40 grand a year, which means that’s $800,000 he’s made off of you. That, that, that you’ve been paying this firm.

Zach:

Nice little chunk of change.

New Speaker:

Imagine what do you think your account balance will be now, if you weren’t paying that?

Zach:

Significantly higher.

New Speaker:

Because you think they’re the only people that know how to grow money?

Zach:

No.

Mike:

And then what’s going to happen the next 10 years. You’re paying them 60 grand a year right now. Actually. I’m sorry. I’m exaggerating. It was like $59,230.

Zach:

A little higher there.

Mike:

You’re paying. What’s your why? If you’re with them for another 10 years, that’s another 600,000. You’re not getting any tax help, not getting insurance help. You’re not getting me estate planning help. Are you really okay with that?

Zach:

I wouldn’t be.

New Speaker:

But he’s a great guy, Zach. It’s like, they wouldn’t believe me. I’m it’s like, they don’t want to believe me. And this is the challenge we get caught in this, but he’s a good guy trap. Your finances, your retirement, your financial planning, you got to stop thinking about it, like, Oh, he’s a good guy. This is your life. This is your financial security. You gotta treat it like a business. It’s like a business. And you got to make darn sure that you’re getting value for what you’re paying for. Stop. It’s kind of like real estate people talk to people all the time. Stop looking at a house that real estate person would say. Especially if you’re a real estate investor, stop looking at a house emotionally. It is a business transaction.

Mike:

The same is true with your retirement planning. Stop, stop. I mean, you got to understand the relationship with your advisor, every single time means more to you than it does to them. I have people all the time. They’re like, man, I don’t know how to tell this guy I’m leaving. They leave. They come to us and they find out, yeah, it turned out It was no big deal. We thought that we were really big deal to the advisor that we were really close with them. Here’s the problem. The advisor that we thought we had a great deal with a great bond with, they got 2/300 other people just like us. And to them turns out losing just one of us isn’t that big of a deal to them. People act like it. You know? So anyway, I got all, it’s like, I get so irritated when I see people who are clearly being taken advantage of, all under the guise of, but he’s a nice guy. Focus on working with a fiduciary focus on a fiduciary. So that’s kind of my message this week, I think.

Zach:

I’m glad we had this discussion and I think for a lot of the people that, you know, the question, this it’s just, I think it’s a lack of education on a lot of this, the general public’s part, they just don’t understand what’s happening with these advisor relationships.

Mike:

And a lot of times I like to ask this question, do you have a complete retirement plan? What do I mean by that? Most people have an incomplete retirement plan. They have an investment plan. You say it all the time and investment plan is not a retirement plan. If all you have is an investment plan, you have an incomplete retirement plan. What are you doing about your taxes? What are you doing about your income? What are you doing about your insurance or your estate planning. A complete retirement plan encompasses all of that. And so, you know, one of the things we always talk about as you’re listening, as you’re watching, you know, if you’re sitting there, you say, man, I feel like I have an incomplete plan. We welcome you to come visit with us. We’d love to talk to you. Let’s help you complete your retirement plan. Let’s make sure you’re touching all the bases.

Zach:

If you want to talk to us about any of these things. If you have any questions about investments, taxes, estate planning, our numbers on the screen, you can always go to talktomike.com. Always happy to have a conversation with you, Mike, any final thoughts here on today’s show?

Mike:

Just simply this. Listen folks. Here’s the deal. Retirement should be the best time of your life. If you work with a fiduciary, you make sure all your bases are covered. You get that complete plan. Then you can truly enter into, into retirement with those three C’s we talk about, you want to be confident. You’re making the right decisions. You want to be in control of your finances. And you want that comfort, that peace of mind, knowing that no matter what comes your way, at least financially, you’re going to be in great shape. So let’s make sure that you’re making those great decisions with that. I think we’re good here this week, Zach.

Zach:

I think we are, great discussion. We’ll see you next week.

Mike:

All right, bye now.

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