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How CarFax Can Help 401k Plan Sponsors and Investors

September 25
00:04 2012

As part of Fiduciary September, we’re proud to present the fourth of a six part series exploring the six duties of all fiduciaries and what they mean for investors. “Essential to fiduciary conduct,” these core duties are defined by the Institute for the Fiduciary Standard and have been provided to by its President, Knut Rostad.

We’re in the middle of election season. Every day, papers proclaim the collective wisdom from the latest polls. Imagine taking a poll asking people to name the least trustworthy profession. If you’re like most people, used car salesman come to mind first when you think “least trustworthy” and “profession.” In fact, in January 2012, Daily Finance listed David Leisure as #15 on its list of “The Top 25 Celebrity Spokespeople of All Time.” Who is David Leisure and what famous pitchman did he portray? None other than Joe Isuzu, the most outrageous lying car salesman of all time.

Why don’t we trust used car salesman? It’s not necessarily because they lie, but because their advice comes courtesy of a huge (that’s HUGE!) conflict of interest. They want to sell cars. Some are willing to do anything to sell those cars. Sometimes that means lying, sometimes it means, well, just not telling the whole truth (that was our second installment in this series). For decades, the average American accepted this conflict of interest as a part of the car buying experience.

Then, in 1984, precisely one year after my first experience with a car dealer (although I believe the two events are unrelated), a fellow by the name of Ewin Barnett III had a brilliant idea: Why not create a database containing the history of every car on every car dealer’s lot. No longer would a fresh paint job and the spray of new car smell hide the wretched past of any particular car. Once regular folks started using this thing called “the internet,” the true history of every car could become instantly known. It no longer mattered if Joe Isuzu was your salesman. You now had an independent source that trumped the natural conflict of interest existing with every car dealer. Car buyers across the nation could now make informed decisions.

So, when do we get to the investing part of this?


The fourth principle duty of all fiduciaries is the obligation to disclose all material conflicts of interest. This onus comes about because some feel, in certain circumstances, the fiduciary cannot avoid a conflict of interest. In these instances, the fiduciary must disclose the conflict in a timely fashion. That disclosure must also provide evidence to the client that, despite the conflict, the action still is in the client’s best interest. Finally, and for his own safety, the fiduciary must obtain the client’s signed acknowledgement of the conflict and agreement to proceed with the action.

But why belabor this point? Here’s why. In a survey release last week, bankers (the proxy for the entire financial industry) were named the third least trusted professionals. Only politicians and journalists were trusted less. That’s not good company. For anyone. To be fair, used car salesmen were not among the choices presented to survey respondents. Still, the numbers are the numbers and speak to the state of the financial services industry. In many ways, it appears the public equates the trustworthiness of financial providers with that of used car dealers in that the inherent conflict of interest cannot be avoided and is often hidden.

ERISA plan sponsors and retail investors who use a fiduciary to obtain investment advice can often escape this problem. The fiduciary must disclose these conflicts of interest. That’s what the Fiduciary Standard is all about. Unfortunately, those investors using vendors operating under the “suitability standard” (and therefore not necessarily required to act in the same capacity as a fiduciary), might benefit from the brilliance of an aspiring entrepreneur.

Perhaps now is the time for a financial minded version of Ewin Barnett III to develop a CarFax for investors. Imagine sitting down with a broker, getting a recommendation, then using your favorite mobile device to easily (as opposed to current rating services) discover just how much that product is paying your friend across the table. It doesn’t mean you won’t or shouldn’t buy that product. It just means you’re making a more informed decision.

Now if we can only invent the same thing to tell us how much those pharmaceutical companies are paying our medical professionals whenever they hand out prescriptions. But, doctors and nurses have it easy. That same survey ranked them as the most trusted of professionals.

Previous: Why Nobody Likes Stinky Pete: What Conflict-of-Interest Means to Investors   |
Next: Mom – The Practically Perfect Picture of a Fiduciary |

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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