A Matter of Trust

Friday, March 30, 2018

By: Christoper P. Cline, CEO and President Riverview Trust Company

My favorite Wall Street Journal writer is Jason Zweig, who writes The Intelligent Investor column. In his March 17/18, 2018, column (“Ten Years On, Loss of Trust Still Hangs Over Wall Street”), he argues that the biggest loss following the Bear Stearns meltdown a decade ago was the public’s loss of faith in the markets.

The public, according to Zweig, sees Wall Street as a place where “good things happen to bad people, and bad things to good people.” People no longer trust that honesty is rewarded and rule-breaking punished, so they don’t have “the confidence they need to sacrifice immediate pleasures for long-term rewards.” In fact, ten years after Bear Stearns blew up and the markets started to collapse, “31% of investors remain angry or very angry about their economic situation.” Zweig concludes by noting that, “[l]ike fine porcelain, trust is easy to break and hard to repair. In many ways, far too little has changed since Bear Stearns drove the first cracks through the illusion of trust.”

How ironic, then, that in the same Journal issue another column noted that the Fifth U.S. Circuit Court of Appeals overturned the Department of Labor’s “fiduciary rule,” which required the brokerage industry to act in its clients’ best interest when investing their retirement savings. The Court ruled that “the Labor Department overreached by requiring brokers and others handling investors’ retirement savings to act in their clients’ best interest.” Seriously?

The ruling’s rationale (which the Court seems to have adopted from the industry representatives behind the appeal) is that millions of smaller investors prefer commission-based fees because they engage in few transactions. The court stated that, under the fiduciary rule, these investors would suffer from higher management fees or would be abandoned altogether by their advisors. The court ruled, in essence, that brokers need not act in their clients’ best interests, so long as what they recommend follows the current standard of “suitability” (whatever that means).

Meanwhile, in the same week, The Wall Street Journal also reported that Wells Fargo’s wealth management division is under direct investigation by the Justice Department. Apparently, FBI agents have been interviewing Wells Fargo wealth management employees in Phoenix, Arizona, looking to see if there were “inappropriate referrals or recommendations, including with respect to rollovers for 401(k) plan participants, certain alternative investments [like hedge funds, commodities or private equity funds], or referrals of brokerage customers to the company’s investment and fiduciary services business.”

Lack of trust indeed

In such a toxic environment, how can an investor trust an advisor’s recommendation to accept some volatility in exchange for longer-term gain? How can the investor know that her advisor is looking after the investor’s best interests, when even the U.S. Court of Appeals says that the advisor doesn’t have to?

As Zweig noted, trust takes a long time to build, even in the best of circumstances. Longer in this environment. But there are a few milepost markers along the road to make an investor feel like she’s headed in the right direction:

1. Are the advisor’s fees fully disclosed?
2. Does the advisor offer financial and estate planning advice as part of that fee?
3. Is there transparency in the cost of the mutual funds and ETFs the advisor offers?
4. Does the advisor have sales goals, so that, even if the investments are on a “fiduciary” platform, the advisor is tempted to put his or her own interests, rather than the client’s, first?

The hardest thing about building trust is that it really only happens after an investor has hired her advisor. These factors alone can’t establish trust. But they at least create a foundation on which trust can be built.