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Client Beware? Harold Evensky's Definition of Fiduciary

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In his response to my January 8 blog, Jay Martin raises an interesting issue about whether a fiduciary standard can or should be applied to securities sales. He writes: “I, for one, am thoroughly confused how sales can or should be fiduciary.”

The implication here is that it shouldn’t be, and I couldn’t agree more. But then he goes on to imply that the standard of “caveat emptor” is sufficient to protect financial consumers in sales situations, and that’s where I have to respectfully disagree.

“Buyer beware” works great in situations where the consumer is an equal party to the transaction and–and this is the important part–understands the nature of the relationship: that the salesperson is trying to sell a car, a cell phone, a putter, an upgrade to a suite, etc. However, when it comes to securities “sales” we all know that’s not the case (whether we admit it or not).

In my own recurring straw poll of asking people over the years, including “sophisticated” investors, lawyers, business executives, high-net-worth folks, and so on, if they think their broker has a fiduciary duty to put their interests first, not one has ever answered “No, they don’t.”

That’s no accident. Since I started covering advisors, Wall Street has spent billions of advertising dollars suggesting, implying, or inferring that what you get from brokers is investment advice. Over those same years, in response to various regulatory initiatives or proposals, the industry has as much as admitted that if they had to fully disclosure the nature of the sales relationship, it would affect sales.

That should be our first clue that something’s amiss. For caveat emptor to work in a consumer securities transaction, the consumer should be made aware that “their” broker neither works for them nor has any duty to act in their best interest. But when brokers, or other “financial advisors,” cross over the sales line into giving advice, that’s when a fiduciary duty should apply to the relationship.

What constitutes advice? Financial planning industry leader Harold Evensky recently defined it the clearest, simplest, most elegant way that I’ve ever heard, using what Harold calls the “you” standard: When a broker or any other kind of “advisor” tells a client “here’s what you should do:” buy a mutual fund, sell a stock, hedge a position, etc., that’s advice. If you simply give them product information, that’s sales.

“But if we do that,” I hear brokers and insurance agents across the country crying, “no one will buy anything.” Maybe that’s our second red flag.