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Fiduciaries with Joe McQuaid

Welcome to the Thought & Action podcast hosted by Erik Flegal. Today I will be speaking with our chief compliance officer, Joe McQuaid about the topic of fiduciary. We will discuss the difference between the fiduciary standard and the brokerage standard. The thought for the day, consider what being a fiduciary means as it pertains to you. There are a lot of impacts that being a fiduciary can have. Most importantly with the ability to hide commissions, but there are other things as well. The action is once you understand the difference, find yourself a fiduciary to oversee your particular situation. 

Fiduciaries  

 

At a very high level, a fiduciary is someone that has financial responsibility for something. It could be a lawyer taking a say through a transition. It’s the person that has that financial responsibility. This isn’t something that you can advocate if you mismanaged somebody. 

There is a legit financial responsibility that you have daily as a fiduciary. 

 

An important facet of Family Fortune Financial 

 

We have four pillars; fiduciary, access, transparency, and community. Fiduciary is probably the most important because it is what guides what we do every single day. Interestingly, this is not mandatory in the United States to have the fiduciary standard the way it is in the UK or Canada. In the US, we have two standards, a fiduciary standard, and a brokerage standard.

At Family Fortune Financial, we abide by the fiduciary standard. We stopped working with the brokerage standard and there are two main consequences from it. One as a fiduciary, we are responsible every single day to make sure that what a client has is appropriate. 

 

Difference Between Fiduciary Standpoints and Brokerage Standpoints

 

From a brokerage standpoint, their responsibility ends once the product has been sold. On the day of the sale, if it was appropriate on that day, that’s important. If their situation dramatically changes a week later, they’re not responsible for that. They’re responsible, the day that it was sold. In a fiduciary world, it never ends. 

The other lack of a conflict of interest, which the broker standard does not take away, is when you’re under the fiduciary standard, you cannot charge commissions. There’s zero incentive to do anything that’s not in the client’s best interest. In certain products that may have a 4 or 5, sometimes a 9 or 10% commission. Someone who’s going to get paid. The sad part about it is it’s not usually fully disclosed either, but someone’s getting paid a large amount of money to sell a particular product to someone.

At Family Fortune Financial, we don’t have that conflict of interest. It’s just purely what’s best for you. We get paid a flat fee, there are no commissions. They’re aligned with who’s paying them. If the client’s paying me and there’s no one else paying me, I’m aligned with them. If a big company is paying me big commissions, that’s where we get our ideas from, and that’s where we get our paychecks. 

As a fiduciary, no commissions, no conflict of interest. For clients; you’re either going to be with the brokerage standard, the majority is 90%+ of advisors in America, or are under that suitability standard. It is a definite difference in the way that you look and approach a client relationship. Primarily you’ll see it with the commissions. That’s going to be the biggest difference.

Different approaches to products depending on fiduciary standpoints or brokerage standpoints are annuities. Anything that has what’s called a surrender charge typically has a big commission baked into it. If you get out of it early, then the client is penalized and it can be anywhere from 3-10 years. But anything that has that, where the client has to hold it, it typically is going to have a nice size. For the advisor and that’s what you’ll typically see with annuities. They’ll pay a good advisor. A percent up to 4%, sometimes more, to sell this product, and then the client is locked in. It goes back to that suitability because you don’t know what’s going to happen in the future as a fiduciary. We need to prepare our clients for the ability to make decisions, based on whatever the situation may be. It would be unsuitable in a fiduciary world to sell something that has a commission structure.

Meanwhile, and in the registered advisor world, there, we don’t get paid commissions, which takes away a lot of the cost of the annuity chassis. It strips out a ton of the cost and it adds a lot more flexibility because as a fiduciary, you need to be able to be nimble. 

One of the other ways that you see it, is with some of the private investments that we invest in. Typically because they don’t have this, the investment banks pay a commission because they want to get people attracted to it. But what ends up happening is, the client’s going to be paying anywhere 3-9% on this particular item. It may be a very good investment, even with the commission baked into it, but it’s when you strip it out.

If a client has a $100 thousand investment, and instead of them starting at $91,000, they’re starting at $100,000, they get an immediate 9% bump. You can see how no matter what you do, your total return is going to be better. A lot of times from a fiduciary standpoint, your total return is going to far exceed anything that would happen in a brokerage world because you’re not paying the commissions and all that excess that you have, compounded on itself. You end up with more money and in a better place as a client. 

 

How The Future of the Industry Will Change 

 

In the future of our industry, a lot of dynamic changes will occur, and a lot of it comes from technology.

The transparency that you can see on things is forcing people to have tough conversations. You can’t hide commissions the way that you used to, even bonds. Their spreads have been stripped out and shown over the past couple of years. It’s a cool time to be a client very similar to these other countries, we will be forced to be fiduciaries. There is no way around it because the conflict of interests are too great. It’s detrimental to give someone bad advice. It is legacy damage. When you are locked into some type of annuity product and you can’t get out, you’re effectively getting paid back your own money over your life without a real ability to grow because your fees are, 3, 4% all-in, as opposed to having a dynamic professional look at all the options that are out there. This puts you into something that invested in something that might be more appropriate, pay you the same amount of income, but gives you the ability to grow by stripping out, not just all the costs, but by putting those costs back into your own life and letting it can compound on itself.

We see a massive shift going towards that fiduciary standard. It’s not a mandated one. We see people getting better advice because of it. We see commissions being stripped out because of technology. It’s happening now with things, these low-cost platforms, betterment and whatnot, and the entry-level. If you have $5-10+ million, you start to need a professional to put all these pieces together because things become very overwhelming. You need, at least on the lower marginal levels, that fiduciary or that daily asset allocation. 

We don’t think you can automate dynamic planning when you get in the higher ranks, but you can mandate transparency, you can mandate that fiduciary standard and the stripping out of commissions is going to make our industry a lot more clear and a lot more helpful.

At Family Fortune, we are fiduciaries. We do not take commissions. We also are not a hybrid, there is this world right now.

Some call themselves a fiduciary and can be an RIA, but also still keep a license and do commission-based trades. It’s a ruse to a degree. It can be very disingenuous, but we’re not that. We’re a pure RIA where we cannot charge commissions ever.

We get clients that get commission checks back in the mail, 4-6-figure checks because we don’t take them. Clients must know that was what was there, but we don’t take it. It goes right back in their pocket and helps them grow in the future. If people are looking for a fiduciary, make sure it’s a pure fiduciary.

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