Thanks to the Department of Labor’s new Conflict of Interest rule — and John Oliver’s “Last Week Tonight” on HBO — “fiduciary” and “reasonable fees” have become household terms. Plan sponsors and investors of all types are encouraged to ask: First, is their prospective adviser required to act in their best interest (i.e., Are you a fiduciary?) Second, are they paying too much for their services (i.e., Am I paying reasonable fees?).
Both are critically important questions. Yet the pair of terms is difficult for financial professionals to define, much less investors to understand.
Communicating the value of a fiduciary
The rule has accelerated the industry’s trend to fee-based adviser services. Increasingly, when an investor asks their adviser if they are a fiduciary, the financial professional responds that they are. However, it is one thing to tell an investor that you are fiduciary, and quite another to communicate the value you give them as a fiduciary.
As a fiduciary, you are required to act in clients’ best interest. You cannot fulfill your fiduciary duty by merely providing your clients stacks of paper with unintelligible fine print. Your duty is to help them identify their financial objectives, establish a plan to help them meet their objectives and regularly review the plan to make sure that they are still on track to meet their goals. As investors, they will likely experience unexpected highs and lows, but your job as a fiduciary is to help them prepare for and weather the unexpected so that they have the best possible chance of meeting their objectives.
Defining the reasonableness of fees
A key responsibility of a fiduciary is to ensure that clients pay no more than reasonable fees. And yet, “fee reasonableness” is not a phrase the DOL clearly defines, except to say that “Fees and expenses are one of several factors to consider when you select and monitor … service providers and investments. The level and quality of service and investment risk and return will also affect your decisions.”
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While financial professionals may easily assess a portfolio’s risk and return, many investors think only of returns and losses. In today’s volatile market, it is increasingly difficult to remind clients that reasonableness is not the same as short-term performance. However, the fiduciary’s mandate requires that advisers help their clients re-evaluate reasonableness by assessing value in relation to their investment objectives.
Help clients remember their investment plan
When considering any product or service, factors other than what’s tangible are researched, considered, and scrutinized. The evaluation of value needs to be objectives based. Help clients remember their long-term goals by documenting their objectives with an investment plan. Rather than comparing the performance of various investments to one another, encourage investors to revisit the investment plan. Remind them why, or why not, the investments continue to be chosen year after year. Remind them that part of your value as a fiduciary is that you have a long-term commitment to helping them reach their investment goals.
Remind clients of their investment objectives
Your fiduciary duties are not over when an initial decision is made. You are committed to fulfilling your duty to continue to monitor decisions and act accordingly in order to meet their investment objectives. When you have helped your client identify their investment objective, you considered time horizon, withdrawal needs, and risk preference. Especially during periods of short-term underperformance, clients may need a reminder that their objective is not to beat the current market environment — investments are a tool to prepare financially for the future. While clients may feel better or have fewer questions about investment strategies that track the market or avoid sweeping market fluctuations, such strategies may not adequately achieve their need to generate income to satisfy future withdrawal needs.
Value is a dense concept and difficult for many of investors to assess without being distracted from short-term performance. Because of this difficulty, it is crucial for advisers to dissect all factors of value to evaluate what is needed, wanted, and warranted in order to bring investors back to their objectives.
