Understanding the Fiduciary Standard

To grasp the fiduciary standard, you need to understand two things: what it is, and how it affects you. A fiduciary is legally obligated to act in your best interest. Sounds simple—but here’s the catch: not all financial advisors are fiduciaries, and many who aren’t still sound like they are. Having worked as an advisor not bound by the fiduciary rule, I can tell you—good intentions aren’t enough.

Advisors often work within systems controlled by large firms. For example, Morgan Stanley is rumored to have asked ETF providers to pay them distribution fee’s or be blocked from there platform. What does that mean? 

That creates a conflict: the firm can remove low-cost options that don’t pay them, even if those are better for the client. So, while your advisor might want to do the right thing, the firm’s priorities often come first—and the cost of that is passed down to you.

Mutual Funds vs. ETFs: What You Might Not Know

Let’s talk about mutual funds and ETFs—and specifically, taxes. Mutual funds can surprise you. You may think you only owe taxes when you sell, but the fund manager’s trades throughout the year can generate capital gains that are passed on to you—even if your investment lost money.

You could buy into a mutual fund in November, and by December, get hit with a full year’s worth of taxable gains. ETFs, on the other hand, typically don’t have this issue, which is part of the reason they’ve grown in popularity.

Now, fund companies are trying to turn mutual funds into ETFs to get the same tax efficiency—but they don’t want to reveal their daily holdings.

Here’s a story about JP Morgan wanting to do something like turn a fund into an ETF. They mostly talk about how JP Morgan doesn’t want to be transparent. It’s like they’re afraid someone will copy their secret sauce. Honestly, that fear seems a little overblown.

General Motors

GM just settled with the Justice Department over the ignition switch recall fiasco of 2014. Remember the GM ignition switch recall? GM knew in 2012 that certain switches could shut off engines and disable airbags mid-drive. But they didn’t act until 2014. That delay resulted in a $900 million fine from the Justice Department.

Interestingly, the SEC also had an opinion, but for a different reason. GM told its accountants about the defect too late, making it hard to evaluate the financial impact of the recall. The SEC fined them $1 million for not properly considering disclosure rules. Basically, they were fined for not being timely in how they considered being timely.

It all feels a bit ironic. The Justice Department penalized GM for acting too slowly on a life-threatening issue. The SEC seemed to suggest they should’ve waited even longer—at least in terms of accounting.

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