For the last couple years, the DOL Fiduciary Rule has been talked about ad nauseam - unfortunately that still doesn't mean it's fully understood by consumers or professionals in the industry for that matter. The fact that a majority of financial service industry firms, associations, and even Chamber of Commerce groups have challenged & oppose the ruling haven't helped the situation.
That being said, a few months before the rule went "live," a fellow financial planner, Meg Bartelt, started a discussion in our online community forum about helping our clients understand what the fiduciary rule means and how can we explain the rule without going over their heads?
The question most of us were looking for an answer to, was this: "Does anyone have a good analogy they use when talking about the differences between a suitability standard and fiduciary standard to clients and potential clients?"
There were a number of responses, but the crowd favorite - myself included - came from financial planning guru, Backdoor Roth IRA Ninja, & the unofficial co-founder of the "Niche" Game, Michael Kitces:
"Suitability means selling a suit that fits you. Fiduciary duty means it actually has to look good on you, too."
The DOL's "Suitability vs. Fiduciary" debate has been going on for close to a decade and even though consumers are starting to pay a bit more attention to it, there is still a big disconnect and we as advisors could do a better job of helping people understand the differences in this debate by framing it in a more familiar context.
Cable TV vs. Streaming TV
Alright, to help people understand the difference between a "Suitability Standard" and a "Fiduciary Standard," let's think of the disruption going on right now with how we watch TV.
Traditionally, the only option was to buy a bloated cable or satellite TV package just to get the one or two channels you really wanted. After the fee for the package, then there's the equipment rental fees, the service fees, government surcharges, taxes, up-sells, poor customer service, and then, on top of all of that, you're locked into a long term contract. It's not uncommon to see monthly bills between $200 - $300.
Now that there are other options with things like Hulu, Netflix, and Amazon Prime, people are moving away from the traditional model in droves. Even individual channels are spinning off their product from these huge packages, allowing people to pick & choose what they want to watch. Watching Game of Thrones has gotten a lot more affordable!
Price, flexibility, transparency, personalization, mobility, and customer service are just a handful of variables that people have cited as the reason for cutting the cord from cable and signing up with a streaming service.
Who do you want to take advice from?
If the cable company were a financial adviser, this is maybe what the "Suitability Standard" would look like from that perspective:
- "This is the way it's always been done, I've done this for over 25 years, this is the best way to do it because there isn't any other way to do it"
- "My advice to you - which is the same thing we are offering to everyone between the ages of 25 & 65 in your geographic location for the next two weeks - is a recommendation to purchase 1 of our 3 proprietary products that you can have when you sign this 10 year contract."
- "Oh, I'm not a tax adviser - which if you read the teeny tiny fine print in the 45 page contract you signed last year, you would have seen that - so I can't be responsible for the advice that I provided to you about taking money from your 401(k) that really screwed up your taxes last year. We provided you education - not advice - about an option available to you and once you made the final decision to do that, you decided that you wanted "XYZ Product," - even though that was the only option we showed you. By the way, do you know 5 people in your network that would appreciate the same type of service I've provided to you?"
If the streaming TV company were a financial adviser, this is maybe what the "Fiduciary Standard" would look like from that perspective:
- "You're currently over-insured in both the amount of your coverage and in the type of coverage. You have about $500k more life insurance than you need, even with your worst case scenario. In addition, you're paying for whole life insurance, a much more expense policy since the insurance company knows it will have to pay out. With a combination of reducing your coverage and using term insurance, you'll save about $850/month, be appropriately covered, and have the ability to fully fund two of your short term goals."
- "Try us out for free - if after 30 days you're not happy, let us know and we'll cancel the arrangement. If not, continue to use our service for the agreed upon price on a month to month basis until you feel you're no longer receiving value or need to tighten up your own purse strings. Cancel anytime at no additional cost."
It's not about perfection, it's about transparency
Although it may not be perfect, the message you should take away from the analogy is this: what you pay for financial advice should be easy to find, easy to understand, and in your best interest at all times, not just when it's convenient for somebody else.
If someone is in the business of providing financial advice, that advice needs to be held accountable, the same way lawyers, doctors, and accountants are held accountable for their actions and advice. Having a fiduciary standard is a step in the right direction, but it's only a small step with a long ways to go.
My recommendation in the mean time?
Cut the cord.