"You Don't Know What You Don't Know"

Donald Rumsfeld sparked ire from opponents when he made this statement about terrorist threats. Yet, I think it’s a very intelligent statement and applies to many different areas. When you are trying to study an issue to make conclusions, what you cannot calculate is what you don’t know. It’s like doing a math problem when you don’t have all the terms. You can get any answer when you don’t know what you’re adding.
I am very concerned that many people also don’t know what they don’t know when it comes to how financial service companies do business. Right now, there is a huge fight brewing in Washington about forcing brokers to adhere to fiduciary standards. Now, that requirement rests only on investment advisors. Do you know that there are two different models that people who manage your investments can choose from? One, the brokerage model, does not require that the broker act as a fiduciary with your money. The other, the investment advisory model, does. What does the word, “fiduciary,” mean? My summary of the definition really boils down to the person who you trust to make decisions with your money needs to be acting in your best interest, not his or her best interest. The “fiduciary” standard is higher than the “suitability” standard that brokers follow, which says the investment is fine for you—it’s suitable. The fiduciary standard requires that the choice be the best for you.
For the record, the brokerage industry hates this and is pouring large amounts of money into the fight to be allowed to maintain their “suitability” standard. However, financial reform legislation is in the works, with an outcome still to be determined. So what do you do?
First, be aware that the term “financial advisor” is generic and is applied to anyone in the financial services industry. Just because they call themselves a financial advisor does not make their firm an “Investment Advisory” firm. It’s a specific business model. Second, ask your financial professional if they are willing to act as your fiduciary in their advice and execution of any trade, and if they will put the fiduciary disclosure in writing. Be very specific about your terminology and your insistence that their response be written. Any financial professional (broker or investment advisor) can choose to act as a fiduciary; many brokers just don’t. Investment advisors must, by law. If your professional won’t agree to this, I can’t tell you what to do, but you need to be aware that he or she won’t make that commitment. Third, begin to follow the national debate about this issue. You need to be informed—it’s your money.
Be Prosperous!
Peggy