There’s been much debate recently among regulators, industry associations, and advisors themselves about fiduciary responsibility. Jim Dew, principal and sole practitioner of Dew Wealth Management in Scottsdale, Arizona, sometimes wonders why. From his perspective, anyone in the financial services industry–an advisor, a planner, a broker, an agent, or a salesman–who deals with people and their money should operate as a fiduciary.
As an RIA, Dew has a fiduciary responsibility, but that’s not his sole motivation. “I feel a personal responsibility based on my own ethics and morals, that it’s the right thing to do,” he says. “If you take an insurance professional, or someone that works at a bank, or a mortgage lender, a lot of those folks don’t have a fiduciary responsibility by law, but in my opinion, they’d be better off in the long run, both for themselves and the client, if they did take their own stand and act as if they were a fiduciary and put the client’s interests first and fully disclose everything.”
Dew has about 200 clients and $45 million in assets that he oversees. His firm’s compensation is fee-based and comes from asset management fees, which account for the majority of revenues, planning fees, and commissions on certain annuities and insurance products. “It depends on how the client wants to put things together,” Dew explains. “If they want us to manage an account of stocks and bonds, then we would charge a fee for the assets under management. If they needed a long-term care policy, we’d get paid a commission.”
Dew firmly believes that in an advisor/client relationship, both parties have to put all their cards on the table. He stresses that all commissions and fees are disclosed to the client and he never charges a fee for a consultation that results in his receiving a commission. Dew charges a 1% fee for asset management, although he says that’s negotiable on really big accounts, and recently doubled his minimum client size to $500,000. “We do charge flat fees and hourly fees, but typically those charges are fees that people incur in the beginning,” he says. Often people who are uncertain about whether their current advisor is doing a good job will ask Dew to perform an analysis of their current situation, for which he charges a flat fee. “A lot of times people just want a second opinion,” he adds. Dew notes that he thinks most advisors do try to put the interests of their clients foremost, but without a clear delineation of a fiduciary standard, clients sometimes just aren’t sure.
To illustrate his point, Dew says that when he walks into a car dealer’s showroom and the salesman starts complimenting his taste and acting like they’re best buddies, he doesn’t take it personally. “I know that’s part of the game. I know he’s a sales guy,” says Dew. What Dew thinks many people fail to realize is that when they go to their broker’s office or to a mortgage lender that it’s often the same thing. “A lot of times they assume that those professionals have to put their interests before their own, and it’s not true.”
If fiduciary responsibility is the foundation of Jim Dew’s practice, mutual respect is the ground floor.
“What I mean by respecting the client is making sure that everything is disclosed, that they have all the pertinent information, that there’s no fee gouging or unnecessary commissions,” he says, “I’m telling them about the downside, not just the upside, because there are always numerous things that are not good about anything that I’m going to recommend, whether it’s CDs, stocks, mutual funds, managed accounts, or long-term care insurance. My job, out of respect for the client, is to detail all those things.”
The respect Dew expects back comes from having demonstrated to clients that everything is out in the open and their interests always come first, but the advice they get won’t always be what they want to hear. “If my client doesn’t respect me, then I can’t have the hard conversations,” he says. “If we have mutual respect, then when I come to them and say, ‘Look, here’s my recommendation, but let me tell you all the things that are wrong with it,’ or when I say, ‘I don’t think you can afford that house,’ or ‘You’re spending too much. You can’t spend that way and expect to keep money beyond your 80s.’ Those are the hard conversations I have to have. If we don’t have mutual respect, I may drive them away.”
Although Dew is willing to lose clients if that’s the price of his honesty, so far he says it hasn’t been a problem. In fact, he reports that since he’s adopted that attitude his referrals have never been better. He says his approach is along the lines of what would he want if he were in his clients’ shoes.
“I’ve had people come into my office with $5 million in investable assets and I didn’t take them because I felt they didn’t respect me,” he relates. “They saw me almost like a commodity. ‘This guy is the flavor of the month and if he doesn’t outperform this index or that index, we’ll just fire him.’ I didn’t need to do that, I didn’t want to do that, and ultimately I think people like that just sap your energy.”
Like many independent advisors, Dew began his financial career with a brokerage firm, working in the Arizona office of the MONY group. He had a great first year and so was made a manager, in addition to continuing to run his own practice. Subsequently he also became the firm’s compliance officer for five Western states. “I always say that the one year I did compliance, I got 20 years of experience,” he explains. In that position he dealt with numerous experienced planners whose businesses were an open book. “I could ask them all kinds of things about how they built their business, about their philosophies, why they were doing one thing and not another for a client,” he recalls.
As a compliance officer, Dew says he didn’t meet any advisors who were intentionally hurting clients, but he did find cases where the advisor’s own biases might lead to a lack of full disclosure. “They would spend 90% of their time on why this was the best mutual fund, or why the client should have stocks, or whatever else, but not talk about all the drawbacks,” Dew recalls. “Anyone that I’ve ever gone to for advice has never said to me, ‘Jim, do Plan A and there’s no drawback to it.’ They all said, ‘If you do that here are the drawbacks and the benefits,’ and then I went away and made my own decision. I said that looks like a better way of doing things.”
After continually butting heads with managers who saw making money for the B/D as the top priority, Dew decided to strike out on his own. In 1999 he opened Dew Wealth Management.
Outsourcing Leaves More Time for Advice
Dew sees his most important job as providing advice to his clients and making sure that their financial plans are being carried out. “I’m a firm believer that as a financial advisor, it’s impossible for me to stay up on the latest tax laws, estate planning, titling beneficiaries, and also manage the money on a day-to-day, minute-to-minute basis,” he explains. “I also think that as someone who’s looking out for my clients, if I’m wearing the hat of managing the investments as well, I’m certainly not going to fire myself if I’m not doing the job. For a lot of reasons I outsource that stuff. I monitor it, but I outsource it.”
For asset management Dew uses a group of separate account managers, from large national firms and boutiques in the Scottsdale area. He acknowledges that some advisory firms hire CFAs to manage investments in-house, but he’s not convinced that’s the best approach, because of the breadth of knowledge and expertise that today’s investment world requires. “You can’t ignore international, you can’t ignore emerging markets, you can’t ignore what’s going on with subprime, you can’t ignore what’s going on with commodities,” he points out. “I don’t know anyone who can be expert at all those things.”
Dew says he can see some advantages to clients with in-house management in terms of lower fees, but thinks that in the long run clients fare better with money management being handled by someone who is paying attention just to money management. By using a number of different managers, he feels he is able to do a better job of matching each client’s goals with the strategy executed by an individual manager. “The nice thing about it is, that if I don’t like what the managers are doing,” he notes, “we can fire them and replace them very easily,” he says.
While many advisors rely heavily on mutual funds for client investments, Dew thinks they present more drawbacks than separate accounts for his clients. “I wouldn’t say that mutual funds are bad,” he offers. “It’s just that it’s so hard, even for educated people with good resources, to know exactly what’s going on in those darn things–from a fee perspective to a cost perspective, because you know you’ve got the expense ratio, you may or may not have 12b-1 fees in there, you also have turnover costs, and then it’s hard to know exactly what they own. If the client has 10 different mutual funds but there’s a lot of overlap in them all owning the same stocks, there may be a false sense of diversification.”
The aging of the American population coupled with longer life expectancies is a factor that more and more advisors are being forced to take into consideration. “There are many advisors who are talented at helping people grow their money, but I don’t think there are that many out there who are well-versed in how to help them spend their money,” observes Dew. He says he’s spent a lot of time over the past few years educating himself on income planning and finding ways to help clients determine just how much they can spend comfortably, without running out of money.
Among the vehicles that he’s found a place for, much to his own surprise, are annuities. “I was very anti-annuity because of my brokerage experience,” he explains, “but I saw an article in The Wall Street Journal about income annuities and having a life income stream from an annuity can be a really good thing to have in a portfolio.”
As he did the research, Dew discovered that there had been some changes to the annuity market since his B/D days, and found several products that looked like they could offer benefits to some clients in certain situations. “There are certainly still a lot of bad products out there,” he notes, “which is another reason why the consumer needs someone they can trust to give them good advice.
“I think that’s my job–not to make a judgment call that anything is ‘bad,’” Dew continues. He says he points out to clients who may have read that annuities are always bad that the proposition makes no more sense than if the article said all stocks are bad. “I tell my clients that ‘it’s all or nothing,’ doesn’t apply in this industry. Each client has a different set of facts.”
Moreover, sometimes those facts change over time. When he started his independent practice, Dew was fee only, but found occasions where he felt the client needed certain products that were commission-based. He’d tell them what insurance, or what kind of annuity, to buy and send them off to someone else to obtain the product. Often he’d find out months later that they had never acted on his advice. A number of clients told him they felt it would be much easier if they could just buy it from him. At the same time, he felt like he was doing all work and finding the right product for the client, but an insurance agent was getting the commission.
“I sort of swung the pendulum from a position where anyone that gets a commission is a bad person to, well, if you’re putting the client first you should show them all of the options that are out there,” he says. “To me the whole fee/commission thing isn’t nearly as important as having a fiduciary standard. I think people take fees on accounts where the client would have been better off doing something that’s commission-based.”
An Eye on the Future
While Dew is certain that holding advisors to a fiduciary standard will eventually become a matter of course, he’s also identified another trend on the horizon.
He’s started getting calls from other advisors who have either met him at a conference or have heard about him through mutual friends and acquaintances, and want to ask him for advice based on how he’s built his practice. “I think there’s going to be this tremendous need for smaller advisors, independent advisors, advisors who are able to share ideas and help each other to compete with those big institutions, like banks. The advisors who don’t find a way to gather the resources to compete are going to find themselves going the way of the mom and pop video stores that Blockbuster put out of business.”
Managing Editor Robert F. Keane regularly profiles advisory firms around the nation. He can be reached vie e-mail at [email protected]