Fiduciary vs. Broker: Why Should You Care?
In this video, I outline a thought experiment that highlights the differences in how brokers and fiduciary financial advisors work. I also discuss how the differences in advisor fees could save you millions over time.
So why should you care about the difference between a fiduciary financial adviser and a stockbroker? Well if I told you that there were hundreds of thousands of dollars at stake would you care then? Keep watching to find out more.
Hey there folks! I'm Patrick King financial planner and host of Transformative Television. On this channel we have a soft spot for people who are going through the divorce process or have lost a spouse or a loved one, but of course we work with anyone who is ready to transform their financial lives for the better.
If that's you, if you're going through a transition in life, please consider subscribing for more of these types of videos. And if you need financial help through one of these life changes, don't hesitate to give me a call
But in today's episode: fiduciary financial advisor vs. stock broker. What's the difference? Why should you care? Well there might be hundreds of thousands of reasons - maybe even millions - for you to give a damn. Here we go.
All right folks, for today's episode what I want to do is propose a thought experiment. It's cold and flu season here in Atlanta, so let's just say in this scenario, you come down with a little sniffle. You got a little scratch in the back of your throat. You feel like you might get coming down with something. All right, so who do you go see? (That was ridiculous.)
But who you can see in this thought experiment? Let's just say you've got a friend who is a pharmaceutical sales rep. You could go to this friend and say, "Hey bud, I feel like I'm coming down with a little something. What you got for me?”
So in this scenario that friend only has access to the drugs that are available through the company that he or she works for, right? So in this case they go out to the car - because I'm just assuming that all the samples are kept in the trunk at all times - you know, he gives you the samples and you take it and you might feel better. It might actually make you better, but it's certainly not the best option.
This person doesn't have the years of education, experience and wisdom that come along with being a doctor, to be able to actually a diagnose your situation. Not only that it's completely illegal and unethical, but let's put that aside for right now. We'll come back to that one.
So who else could you go see? You can go see the doc-in-the-box, you know, or go see your doctor, your family physician, whoever it is. I like the doc-in-the-box in this case.
Hey Doc! [bam bam] Right? You know, fill out the forms because you got to fill out like eight of these forms these days. You go in – especially the doc-in-the-box - they've seen everything, right? “So, hey, we've had 200 people come through with these same symptoms. Pretty sure it's a virus. Get some sleep. Drink plenty of water. Here's some Robitussin with, you know, whatever they stick in it to knock you out at night. And here's a Z-pack in case it turns into a secondary bacterial deal.”
“Buh-bye. Come back in two weeks if you're not better.”
Okay! In this scenario - in our hypothetical situation - this is a much, much better solution. Is it the best solution? Hey maybe not, but in this case at least you know that they know what they're doing, they're working in your best interests, they're not beholden to a particular pharmaceutical company (unless the rep has been taking them out every Friday now for drinks or steaks or whatever but let's put that aside).
But for the most part, this is a better solution. It may not be a optimal solution, but it's much better. That doctor's working to get you from negative one (being sick) to zero (to not being sick). again All right, so that's option number two in our thought experiment.
And option three, what I would propose, is let's say instead you go to a doctor that practices integrative medicine. All right, so not only are they gonna work to get you better, to help you get over this cold, but they're like, "Hey, how do we improve your life all the way around? You know, let's take a look at your labs. Let's do some scans."
They're gonna ask you about what your what your nutrition looks like. What's your diet? What are you eating? Let's tweak that a little bit. Hey how's your sleep? Maybe they'll order a sleep study. They're gonna ask you about exercise. They might put you in touch with a personal trainer. They might recommend that you go to the gym or go to yoga once a week (or maybe one more than once a week). But they're gonna look at your whole life - every aspect of your health - and they're gonna make recommendations for that.
It's not about just getting you from negative one to zero. That person is trying to get you from negative one to positive one.
All right, so here in this thought experiment, you know, we've got option one: the pharmaceutical sales rep, which isn't a real option for your health. You've got the doc-in-the-box and you've got the integrative medicine doctor.
So how that applies to the financial services industry would be that the pharmaceutical sales rep would be your stockbroker or insurance salesman. You know, I use those interchangeably, but they're basically the same type of person: they're salesmen.
They're going to give you a product and they're limited to - the product that their employer sells. They've got an incentive to sell you certain products over others and they're not required to put your best interests ahead of theirs.
If you know that there's a better option, why on earth would you do that? That's why it's illegal in the practice of medicine.
Why it is not required for the financial planning profession or financial services industry? I have no idea.
All right, so the integrative medicine doctor in this case. I would call the equivalent in financial services would be the NAPFA financial advisor. National Association of Personal Financial Advisors. These are the fee-only fiduciary financial advisors that are dedicated to looking at every single part of your financial life and making sure you go from -1 to +1. Or from 0 to +1. They're trying to make your life better. They're not just trying to slap a band-aid on things, sell you a product
They are required by law to put your interests ahead of theirs. They are independent and they have the universe of investments to pick from so they can choose the best and lowest cost ones for you. Right?
So again, why on earth wouldn't you work with someone like that? Your normal family doctor (or the doc-in-the-box as I like to joke) a lot of times, they're the getting you from -1 to 0. And there are plenty of there are plenty of even fiduciary advisors out there who aren't beholden to a to a company and whatever those products are that that company sells, but they don't go the full distance when it comes to looking at your entire financial health
So again, NAPFA is the place to look for those folks who are really gonna look after you, who are gonna look over your entire financial situation. All right, go looking just to get you over this cold They're looking to make you healthy for the rest of your life. Link to NAPFA in the show notes. Look for an advisor in your area there
Full disclosure, I am a member as well - something I very much believe in.
THE REAL DOLLAR EFFECT OF HIGHER FEES
All right, so one last thought I want to leave you with is that fiduciary advisors tend to be so much more cheaper than brokers anyway. How much are we talking here? It's big bucks!
Now, depending on the advisor and the broker - I've seen differences between 0.5% to 1.5% even - differences in their fees. So to give you an idea, while 1.5% maybe doesn't sound like a lot, to give you an idea, let's say you retired with $1 million and your money's growing at 7% per year at both advisors. Equal growth.
The difference in fees over a 30-year retirement for that person ends up being $1.6 million in favor of the fiduciary financial advisor who is less expensive. It's big bucks!
In fact, I don't even know why I'm still selling this. Like, if you guys haven't figured this out by now I just can't help you.
Again, check out NAPFA. The link is in the show notes. And by the way, those numbers don't even factor in the additional return that most clients see from working with one of those holistic financial health advisors like a NAPFA advisor. That's like a whole - another level that we're not even counting here. I'll do another video on that at some point soon.
All right folks, that's what I got for today. Thank you so much for watching. Click "Like", click "Subscribe" below. If you've got a comment, please leave that. I'd love to hear from you. In the meantime, I'm Patrick King. This is Transformative Television. Until next time, take a deep breath! You got this! Cheers.