You know my concerns with robo advisors. Here’s two questions you can ask to see what’s right for you.
With all your research and interviews, are you asking the right questions? Are you looking for investment counsel? If you are, then Your Survival Guy recommends asking these two questions first: “Are you a fiduciary?” and “Who is your custodian?” Because once you get the answers to those two questions, a lot of confusion and heartache can be avoided. Here’s why.
When you work with a fiduciary, you work with someone who is required by law to make investment decisions in your best interest. On the other hand, those held to the less strict and more common suitability standard are not. They can, for example, put your money in a similar product with higher fees because it’s “suitable” to your objectives. A fiduciary needs to weigh the two, in this example, and act in your best interests. Pretty straightforward. Clear as mud.
In his 2009 article “The Fiduciary Principle: No Man Can Serve Two Masters,” the founder of The Vanguard Group, John (Jack) Bogle, explained the fiduciary duty as follows:
The concept of fiduciary duty has a long history, going back more or less eight centuries under English common law. Fiduciary duty is essentially a legal relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary, who justifiably reposes confidence, good faith, and reliance on his trustee. The fiduciary is expected to act at all times for the sole benefit and interests of the principal, with loyalty to those interests. A fiduciary must not put personal interests before that duty, and, importantly, must not be placed in a situation where his fiduciary duty to clients conflicts with a fiduciary duty to any other entity.
Way back in 1928, New York’s Chief Justice Benjamin N. Cardozo put it well:
Many forms of conduct permissible in a workaday world for those acting at arm’s length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace … As to this there has developed a tradition that is unbending and inveterate … Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior … Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.2
It has been said, I think, accurately, that fiduciary duty is the highest duty known to the law.
When Your Survival Guy reviews prospective customer statements, it’s not unusual for me to see products that pass the suitability test but not the fiduciary. And that can cost the investor a lot of money over an entire retirement life. “Are you a fiduciary?” is such a simple question. Ask it. Better yet, ask for it in writing. It’s crazy what might be said to your face, but then less often is offered in writing.
The second question, “Who is your custodian?” requires you to pay attention to the answer. What I want for you is to work with an advisor who uses an outside custodian. In other words, I don’t want them doing the advising and the reporting. Your Survival Guy likes a separation between the two. Checks and balances, if you will.
When you’re looking for a custodian, the one that tops Your Survival Guy’s list is Fidelity Investments. You know I love Fidelity; I worked there in the mid-90s, have staff who’ve worked there more recently, and have a solid understanding of how the sausage is made. But it’s the separation of church and state, fiduciary and custodian, that stirs the drink.
Action Line: There’s plenty more questions. I’ll keep ’em coming. But put these two at the top of your list and say Amen. When you’re ready to ask questions, I’m happy to answer them.
Originally posted November 3, 2023.
