How Walt Disney Showed Us What the Fiduciary Duty of Loyalty Means to Investors

As part of Fiduciary September, we’re proud to present the first 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 FiduciaryNews.com by its President, Knut Rostad.

If you’ve never seen the movie Old Yeller, watch it before reading the rest of this article. It’s a classic coming-of-age film from Walt Disney Studios. It shows you everything you need to know about the fiduciary’s Duty of Loyalty. Oh, what the heck, if you haven’t seen Old Yeller or you’ve forgotten its salient points (how could you?), I’ll just lay it out for you here. In terms movie buffs will understand, I am required to issue a spoiler alert and inform you the next paragraph contains information essential to the plot of the picture.

Old Yeller tells the story of a young boy (Travis) and the dog (Old Yeller) he loves. In fact, this love, hard won though it was, is mutual and unconditional. On several occasions, Old Yeller risks personal harm to protect Travis and his family from wild animals. In the final confrontation, a rabid wolf bites Old Yeller. When Old Yeller begins suffering from the disease, Travis must, and does, shoot him.

That, Charlie Brown, is what loyalty is all about. Who wouldn’t want a dog as faithful as Old Yeller? For that matter, who wouldn’t want a used car salesman as faithful as Old Yeller?

Well, at least with a car you can always buy a new one. Unfortunately, this is not an option when it comes to your investments. Whether you’re investing in your retirement plan or in a personal savings plan, it’s almost impossible to simply replace a lemon with the latest model. Why? Because, unlike how you use automobiles, how you use investments require time, and every year wasted is a year lost. At least a lemon can, however awkwardly, get you from point A to point B. The same is not true for investments – a wasted year can never be regained.

So, how do you avoid “wasted years” when it comes to investing? Most folks rightly realize they need professional help. What you might not know is, unlike used car salesmen, some, but not all, professionals are legally required to act in your best interests. These professionals are called “fiduciaries.”

What professionals are legally held to this “fiduciary standard”? Certainly bank trust officers are (warning, not all bank officers are trust officers). After all, most fiduciary duties come from trust law. In addition, a Registered Investment Adviser (RIA) must operate under the fiduciary standard (warning, many RIAs are also registered as brokers, who are currently not required to follow the fiduciary standard, so be sure you know which hat your financial professional is wearing). Finally, certain retirement plan professionals act as fiduciaries (warning, many don’t have to right now, but the government may soon require them to).

One of the first – and some say primary – duties of the fiduciary is called the “Duty of Loyalty.” This term actually comes from corporate law (trusts are often treated as corporate entities). It can be broken down into two components: 1) Loyalty; and, 2) Acting in the Best Interest of the Client.

Loyalty means always putting the interests of the clients first. In the case of Old Yeller, he put the safety of the family ahead of his own personal safety by attacking those wild animals. Now, we don’t expect fiduciaries to fend off wild animals, but we do expect fiduciaries for put clients’ interests first. That’s ahead of both their own interest and their firm’s interest. Believe it or not, non-fiduciaries may (and often do) put the interests of themselves or their firms first. Think of how this might work for a used car salesman. If you had a choice to work with someone who will always put you in the car that is right for you versus someone who has an incentive to sell you the car that makes him and his dealer the most money, which one would you choose?

But there’s another side to Duty of Loyalty that sometimes stumps even the most seasoned professionals. This is the requirement to always put the best interests of the client first. This may sound similar to loyalty, but adding the word “best” produces a subtle, yet important, difference. Again, let us return to Old Yeller for an example. At the end of the movie, Travis, despite his own heartache, shoots the sickly dog. Without implying anything on the moral implications of euthanasia, Old Yeller was suffering and, whether Old Yeller knew it or not, he was about to suffer more. Travis put him out of his misery.

Sometimes a client wants something that’s not in his own best interests. A fiduciary is required to act in the client’s best interests. How is this conflict resolved? Well, to be honest, the fiduciary cannot legally take an action against the client’s best interests. If the client demands something not his best interest, and the fiduciary cannot convince him to do otherwise, the client must either indemnify the fiduciary from that particular action or the fiduciary must resign.

Trust me. I’ve seen this happen in real life. Just as Travis fought back tears as he put down Old Yeller, neither the fiduciary nor the client are comfortable with the options when the client wants something against his best interests. This does, however, explain why one of the most famous maxims in selling and client service – “The Client is Always Right” – can never apply to a fiduciary relationship. It’s the fiduciary’s duty and obligation to sometimes play the part of Mick Jagger and tell the client “you can’t always get what you want.”

But, of course, Walt Disney knew this all along and told us so, long before the Stones started rolling.

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.