Cape Cod Barrister

Your Financial Adviser and Common Sense

About ten years ago, I was a member of a couple of on line investment clubs, with members from the east coast to Hawaii. There were even a couple of members from Europe. I remember heated discussions about a stock every one else was invested in but me. The stock; Enron. It was the rage of the club.

My reply to those that ridiculed me for not buying the stock? I read the financials and annual reports, and could not, for the life of me, figure out how the company made money. Well; we know how that story turned out.

The reason for this tale. In this weekends Wall Street Journal, Jason Zweig discusses the current debate in Congress regarding the proposed "fiduciary" standard. This legislation would make certain brokers and insurance agents responsible for exercising the same fiduciary duty as regards their customers as that  exercised by other financial professionals such as Certified Financial Planners. This means only recommending investments and products that are "'suitable" for the client, as well as disclosing conflicts of interest, such as outsized commissions.

As you might imagine, amendments have been introduced; one which would exempt many insurance agents and brokers that sell their firms' own products.

The "fiduciary standard" would seem nothing more than simple common sense. Would you want your adviser to recommend a product or investment that was not "suitable" for you? Of course not. If a sales pitch is made to you, do you understand the product or investment. If an annuity is recommended, do you understand how it works. Do you understand how a company (remember, a stock is only an ownership interest in a company) makes it's money? Is it a suitable long term investment? Is it suitable given your risk tolerance?

While investing, certainly these days, is complex; it also involves a large dose of common sense. If you have to shake your head in wonderment, you could be getting into the next Enron!

Bruce A. Bierhans