“Whose side are you on?” More about that question later. Although eliminating the middleman can sound tantalizingly attractive and make good business sense, there are many tasks we do not do for ourselves. Cutting your own hair, repairing your car and appearing before the IRS are a few examples. You want a qualified professional working on your behalf. When that professional puts your interests first, we generally consider them a fiduciary.
Fiduciary is a controversial word in the financial services industry. A good litmus test might be “Who signs your paycheck?” Are they an agent of the firm or are they paid to represent the interests of their client? In my opinion, good financial advisors have always served in a fiduciary capacity because they want long term relationships and referrals. You need to treat people right.
How do you know you need a fiduciary? Here is a simple test: If you find yourself in a situation where you need professional advice, yet are wary and consider the experts you would approach in an adversarial mode, then you need to hire a fiduciary. Note the use of the word “hire.” These people do not work for free.
Let us look at five situations where the average person needs to hire someone who will represent their best interests.
1. Traveling on safari, climbing Everest or visiting Antarctica. This is the most obvious example. You would not venture into a tropical jungle or climb a mountain on your own. What if you got lost or a storm blew in? Mountain climbers often work with Sherpas, professionals who organize the expedition and guide you through every step of the process.
How a fiduciary helps: The primary job of a professional guide is to get you to your destination and back again safely. Their knowledge, experience and onsite presence lowers the risk. You pay for this expertise.
2. Selling hard assets from an estate. The PBS series Antiques Roadshow has taught us unlikely items have value and others do not. When a close relative dies and you need to clear out their house, you would never knowingly throw away cash, but might unknowingly throw away valuable items.
How a fiduciary adds value: A professional appraiser can look through everything and let you know what has value and is worthless. The gently used sofa costing $2,000+ might be worth $200 tops but the WWII bayonet brought back from Europe as a souvenir might be worth hundreds. They can introduce you to another professional who, acting on your behalf, will know what gets sent to a specialty auction, what goes to the local auction house, what gets sold in a weekend estate sale, what goes to the thrift store and what goes into the dumpster. These people are paid to work for you in establishing realistic market value and arranging an orderly disbursement.
3. Selling a house or other real estate. Selling real estate is complicated. Generally speaking, the real estate agent works for the seller, because they are paying the commission fee. The property needs to be marketed. It might need to be staged. Repairs might need to be made. All these costs are unknowns to the seller.
How a fiduciary adds value: Remember the Prudent Man Rule from your Series 7 exam? A fiduciary keeps an eye on costs, spending (your) money as they would their own cash. They avoid unnecessary expenses. Once you go to closing, you discover the escrow your mortgage serve provider held does not come back to you at closing. Someone has to follow up, making sure you get the cash. In our case, we discovered the insurance provider was paid the next year’s premium, effectively insuring the house for the next owner at our expense. Someone needs to chase after that cash, which can be in the thousands.
4. Managing rental property from a distance. Renting out houses or apartments can be a good total return investment for many reasons. Rents usually move in line with inflation. The underlying property has value that can increase. Rents provide a yield in a similar way that bonds provide yield.
How a fiduciary adds value: You want an intermediary between you and your tenants. You want someone who prices the rent in line with the market, advertises and screens applicants, collects rent and follows up with nonpayers, taking regal action when necessary. Repairs will need to be made. Some service providers may try to take advantage of owners living at a distance, because they will not be onsite to inspect work or compare prices. A good property management company handles all this for you, getting work done through trusted service providers at reasonable prices. This service comes at a monthly cost.
5. Providing advice on your personal finances. This is where you come into the picture. Investing is complicated. There are fees involved. Some people might think investing is as simple as buying a couple of tech stocks and holding them forever. In that case, a one time transaction fee makes sense. What if the firm loses it’s dominant market position? This situation also brings in another profession, accountants. Do you want to pay what’s asked for or the minimum you owe consistent with the tax law? If something went wrong, do you want to represent yourself at an IRS audit? When it comes to investing, many of the people offering advice are paid based on you buying the products they represent.
How a fiduciary adds value: Ideally, you can commission a financial plan that is portable. You know what you need to do concerning implementation. You can do it yourself, work with an outside advisor or work with the advisor who developed the plan, taking the relationship to the next level. In the first two cases, you can pay for follow-up visits. You want the person providing advice to look at the universe of suitable investments, then recommending the best. You do not want them limited to the products they represent.
There are people who would cut out the middleman in order to save money. In each example, it is obvious how the professional protects your interests and acts as a fiduciary. If the prospect or client can understand the logic in the first four examples, they should understand why they need professional advice and guidance as an investor.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.