Why Nobody Likes Stinky Pete: What Conflict-of-Interest Means to Investors

As part of Fiduciary September, we’re proud to present the third 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.

Nobody likes Stinky Pete. And it’s all because nobody liked Stinky Pete. Compared to Woody, Jessie and Bullseye, Stinky Pete the Prospector had few, if any, fans. When the makers of Woody’s Roundup decided to extend their franchise into children’s toys, parents swept Woody, Jessie and Bullseye from the shelves. Poor Stinky Pete. He remained, all alone, imprisoned in his original packaging. Years later, despite the obvious value accrued from his unopened condition, Stinky Pete vowed to never return to that darkness again. And he was willing to do anything to insure it.

If you’re familiar with the plot of Toy Story II, you know Stinky Pete’s desire causes him to offer conflicted advice to Woody. And Woody, sincere guy that he is, easily falls for it. It’s not until Buzz and the gang come and convince Woody to sing a Randy Newman tune from the first movie that Woody realizes he owes Andy his true loyalty (for more on this trait, see “How Walt Disney Showed Us What the Fiduciary Duty of Loyalty Means to Investors,” FiduciaryNews.com, September 11, 2012). Only when Woody decides to leave does Stinky Pete reveal the nature of his conflict. The spurned toy then switches his strategy from slick persuasion to outright abduction.

Pretty intense stuff, (although not as intense as what awaits in Toy Story III). But what can the misadventures of make-believe fictional character teach us about a fiduciary’s duty to avoid all conflicts-of-interest?

Well, we can plainly see what happens when advice is offered in a scenario where a conflict-of-interest exists. The investor will get carted off to some museum in Tokyo, never to see his family and friends again.

This metaphor isn’t far from the truth.

The reality is most conflicts-of-interest arise from fees. And if an adviser bows to the master of the almighty dollar, then the investor suffers. This is more than a mere caveat emptor (“let the buyer beware”) story. We’re talking about the ability for an investor to realize his financial goals. As we’ve seen from academic studies, what investment strategy you pick has less impact on your financial success than you think (see “New Study Reveals Three 401k Strategies More Important than Asset Allocation,” August 24, 2012). Still, higher fees will erode your investment returns and may overcome the positive influence of those non-investment factors you can easily control.

Let’s put this more directly. A study completed several years ago showed folks who buy mutual funds through brokers (and, therefore, pay a fee to buy the fund) lose 1% per year on average versus those who buy mutual funds directly (and, therefore, don’t pay a fee to buy the fund). How significant is 1% a year? Over a 30 year time span, this annual 1% erosion will eat more than 25% of an investor’s total return.

Still think conflicts-of-interest are just a theoretical problem you can ignore as insignificant?

In the end, Stinky Pete remained loyal only to himself. He had an interest in keeping the foursome together. The Tokyo museum wanted the complete set or nothing at all. When his conflict-of-interest was revealed, his only choice was to kidnap Woody and the others. Fortunately, with a little help from Buzz Lightyear, Woody saves the day and the mint condition Stinky Pete leaves as the newfound property of an overzealous pre-pubescent cosmetologist.

How many investors belatedly discover hurtful conflicts-of-interest, simply to find their assets kidnapped by multi-year surrender fees?

Not even Buzz can save you from this prospector. After all, he’s only a toy.

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.