Eddleman and Eddleman LLC has chosen to be a fiduciary for more than a decade. And while we believe that a fiduciary implementation is the best for clients, we also believe that individuals should have the option to choose how they implement financial services. But, there’s been a battle raging over this same decade of who is a fiduciary, who isn’t and who should be. Some of our peers are also fiduciaries; they believe that everyone in the investment industry should come under the fiduciary rule. However, there are alternative ramifications when the government gets involved and starts forcing businesses and individuals to interact in certain ways.
So what is a fiduciary? On a basic level, a fiduciary is an entity that manages the affairs of another with the highest level of care. When it comes to investing, a fiduciary has a legal responsibility to do what is in the best interest of the client. Currently, all investment advisors are required by the Investment Advisors Act of 1940 to be a fiduciary to their clients, while stockbrokers are regulated by the Securities and Exchange Act of 1934, which does not require a fiduciary duty to their clients. Stockbrokers are required to make “suitable” investment suggestions for their clients, but they are not required to make the best suggestions for their clients. For more information on the differences between stockbrokers and investment advisors, read this article from Forbes.
Currently, the Labor Department has proposed a bill that would raise the investment advise standards for stockbrokers. The bill would require stockbrokers and potentially others in the industry to be fiduciaries. Not only would this bill change the way that stockbrokers give advice, but the wording of the bill could also cause a censorship of the media. Media personalities who give advice to individual callers or audience members might no longer be able to express their opinions on specific investment situations. This raises questions about whether or not the bill violates First Amendment rights. This article from Forbes gives a more in depth look at how this bill could cause problems for media members.
When it comes to investment risk, two facts are true for everyone! Everyone takes investment risk, but risk doesn’t necessarily mean return. You might be saying to yourself either, “I don’t take investment risk,” or “I like risk, it means more return.” Well, I’m sorry to say it, but if you are either person, you’re wrong. Now, before you become defensive, please let me explain.
First let me address those of you who think you don’t take investment risk. The fact is that if you have any money (or possessions), you take investment risk. There are many types of risk associated with money and possessions that people do not consider. If you say, “I don’t invest! I purchase possessions.” You incur devaluation risk. If you say, “I don’t invest! I put my money under the mattress.” You incur inflationary risk. If you say, “I only use certificates of deposit that are FDIC insured.” You incur Interest Rate Risk. If you say, “I only use government bonds.” You incur Reinvestment Risk. The point is regardless of how safe you think your money is, you are taking risks if you have any money or possessions anywhere. The fact of the matter is that life involves risk. If you are alive, you have taken risk, you are taking risk, and you will continue to take risk in all areas of your life including money. Let’s look at a few different parts of life to draw some analogies. Relationships. If you believe you don’t incur risks in your relationships because you refuse to have any, you take on a whole new set of risks. For example, you risk growing old alone. Transportation. You refuse to fly in a plane because you believe they are dangerous. Consequently, you take on even more risk by driving long distances and increase your chances of having a car wreck.
Perhaps you’re the person who believes that risk equates to reward. You must understand that all risks are not created equal. Regulatory Risk, Business Risk, Call Risk, Currency Risk, Market Risk, Liquidity Risk, Event Risk, Opportunity Risk (Cost), Political Risk, Operational Risk, Prepayment Risk, and those previously mentioned are just a few of the types of risk that exist. There are numerous risks that you may take for which you are not compensated, and there are other risks that you may take for which you are more likely compensated. Let’s look at some more analogies. Relationships. You only date persons who have a history of lying, but taking on this risk will not reward you with better relationships. Transportation. You understand the driving with no brakes is dangerous, so you disconnect the brakes to your car in hopes of getting to your destination faster.
These analogies may seem silly, but hopefully they help you to understand that every individual takes risks with their money and that all investment risks do not have an expectation of return. Over the next several weeks we will explore some of these investment risks so that you can make more informed decisions about investing your money!
For more information on investing, visit our financial planning page.