Why are Millennials Suddenly So Interested in What “Fiduciary” Means?
Rebecca Liebman graduated from Clark University in Worcester, Massachusetts just a little over a year ago. She majored in Global Environmental Studies, but a realization that, like many of her peers, she needed to learn more about finance led her to create an on-line financial learning tool for millennials. The site, call “LearnLux.com,” helped propel Liebman to receive Forbes’ 30 Under 30 Honor. It allows millennials to ask general questions (e.g., “How do I start an IRA?”). She recently explained the motivation behind her start-up and what she’s learned to date at 2016 Personal Finance Reporting Workshop, hosted by the National Endowment for Financial Education and the Society of American Business Editors and Writers. In the process, she revealed the number one question millennials are asking her site.
“Lately, it seems millennials are quite interested in knowing what a fiduciary is,” Liebman told the audience of financial journalists while speaking on a panel addressing the topic “Millennials and Money: The Financial Crisis Hangover.” Liebman’s site just answers the question, it doesn’t get into the “Why?” behind the asking. Liebman felt the sudden interest in “fiduciary” may be related to the increased coverage the term has received as a result of the DOL’s new Conflict-of-Interest Rule.
Financial advisers who work with millennials are quick to agree with this. Mel O, a financial advisor at Hot Moon Financial in Las Vegas, Nevada, says, “The recent DOL ruling that is affecting our industry and the ‘Fiduciary’ nature of advisors, I think that is why there is a spike in mentions.”
Indeed, the series of unfortunate financial events over the last couple of decades may have left a poor taste in the mouths (and minds) of millennials. Tara Falcone, a 2011 Yale Graduate and Founder of ReisUP, an investing education company for millennials, says, “Aside from it being a buzzword in the media recently, I think the reason millennials are asking ‘What is a fiduciary?’ is two-fold. First and foremost, they’re trying to figure out who they can and cannot trust in the financial industry. Growing up witnessing the dot-com and housing bubbles instilled significant distrust and skepticism toward Wall Street in this younger generation. Second, millennials are aware of how much they don’t know about their finances and feel vulnerable as a result. This combination of distrust and vulnerability is pushing them to seek out advisors who are not only more knowledgeable, but that also have their best interests at heart. Hence their peaked curiosity about fiduciaries.”
The Context In Which Millennials Ask About the Meaning of “Fiduciary”
Many millennials seemed to have listened to this “best interest” message promoted by the DOL’s campaign. “I work with millennials quite a bit as they are a strong component of my client base,” says Divam N. Mehta of the Mehta Financial Group, LLC in Glen Allen, Virginia. “Many millennials have asked whether I am a fiduciary. Moreover, I believe the context they have asked me is whether I am putting their best interest first and providing the highest level of care.”
For those millennials in a solid financial position, the question of “fiduciary” comes up in many contexts. Traditionally, estate planning often offers just such an opportunity. Charlton M. Messer, Esq., Attorney and Counselor at Messer Law Firm, PLLC, located in Dallas, Texas, works with millennials advising them on the best path of estate planning at a relatively young age. He also prepares and executes the documents of their estate plan. He says, “I always recommend my clients see a financial advisor. Planning for the future, it is just as important to have a legal plan (wills, trusts, etc.) as it is to have a financial investment plan. This is when the fiduciary question comes up. Most people have seen in the news that financial advisers will all soon be required to act as fiduciaries for their clients, and my clients are curious of what ‘fiduciary’ entails.”
Of course, it’s not just millennials who have begun asking the question. Andrew Kleis, a Partner at Insight Wealth Group in West Des Moines, Iowa, says, “While the focus of our business is on high net worth investors, we find ourselves working with more and more millennial investors as they establish themselves in their professional roles. We find them to be ardent savers and very adept at doing the research to identify the best advisor for their situation. We’ve found that while they may not necessarily understand what a ‘fiduciary’ is, they’ve seen enough about it to know they need to ask (I’d say this is true for older investors as well).”
How Financial Professionals Answer Millennials
There are many correct ways to describe what “fiduciary” means. Defining it in its most blunt terms can often yield an immediate (and effective) response. “We find it is important to walk them through the different standards (best interest vs. suitability) that advisers and brokers are held to,” says Kleis. “When they learn that it is possible someone could suggest an investment that is not necessarily in their best interest, they’re surprised to say the least.”
Beyond this, a more elaborate response can offer a practical guide of what to seek and what to avoid. Joshua Wilson, a 33-year old Partner & Chief Investment Officer at WorthPointe Wealth Management, in Plano, Texas, works with millennials “in the context of investment choices or insurance. He says, “I praise them for doing their homework and being prepared to ask such a question – it’s a great place to start. Yes, we are a fiduciary at all times. I ask them why this is important to them. They usually say they don’t want to just be sold a product. I tell them that it’s an important distinction that we are a fiduciary at all times because some advisors are ‘hybrids’ or ‘dually registered.’ That means that they only function as a fiduciary some of the time. To cut through all the clutter, what they should be thinking about is does their advisor get paid by anyone else besides their client, any portion of the time? Whomever pays the advisor is who the advisor works for. You want to make sure your advisor only works for you. Lots of places can quote low fees on what you pay them directly, but then sell you products that charge fees that you don’t see. The product then pays the advisor.”
Then, of course, there’s always the legal response. “As an attorney, I am always acting as a fiduciary for my clients,” says Messer. “I explain to them a fiduciary is someone who must act with the interests of their clients above their own interests. Generally, there are two parts to the fiduciary duty. The first is the duty loyalty, which means someone acting as a fiduciary cannot self-deal against the interests of the client. An example of self-dealing is giving advice to a client for the fiduciary’s own benefit. (In some cases, a duty of good faith is spun off from the duty of loyalty.) The second part is the duty of care, which means the fiduciary must act in the same manner a reasonably prudent person would act in their same situation. The duty of care guards against fiduciaries making outlandish decisions in regards to their client.”
How Millennials Respond to Financial Professionals
Thanks to the increased public discussion on the meaning of “fiduciary,” it’s easier for millennials to understand the frequently complex answers financial professionals provide. “When you combine the discussion of the best interest and suitability standards with an in-depth discussion of adviser and broker compensation,” says Kleis, “they quickly begin to get a grip on the need to hire a fiduciary for their financial advice. In the end, the fiduciary conversation is an excellent educational topic to help them understand how financial advice works and what might be the most suitable path for them and their family.”
Still, that doesn’t mean there won’t be some initial shock. Wilson says, “They usually respond that they didn’t realize that could be the case. Advisors tend to tell you about the duties that they have and leave off the duties they don’t or when they don’t have them.” Eventually, though, they embrace the broader message and apply it. “Most Millennials take in this information and tell me they will only speak with a financial adviser if the adviser is a fiduciary,” says Messer. “More often than not, they are surprised that all financial advisors are not already required to act as fiduciaries.”
The Real Point of View from the Millennials Themselves
Falcone, who has practiced writing and speaking to the financial concerns of her generation, can best define “fiduciary” in terms millennials can most understand. She says, “Long story short, a fiduciary is considered the most trustworthy type of advisor because he or she has to put your, the client’s, interests first, even if it hurts them. In the case of financial advisors, it’s important to recognize that not all advisors are fiduciaries. What does that mean? All advisors and brokers are required to abide by something called the suitability standard, which means they have to recommend products that are suitable for you, or fit your specific financial goals. A fiduciary, however, takes that standard a step further. Rather than suggesting any product that fits your goals, a fiduciary can only recommend the best product that fits your goals. For example, a (non-fiduciary) advisor may recommend a certain investment because it meets your needs, but also because he or she makes a fee, or commission, off of it. A fiduciary, on the other hand, can only recommend the absolute best investment for you, even if it means forfeiting their commission or possibly referring you to someone else.”
Millennials Reveal the Real Reason from their Sudden Interest in the Meaning of “Fiduciary”
Brooke Knisley, a 26-year-old freelance writer at BrookeKnisley.com from San Diego, says, “I’m not a financial adviser, but, as a millennial, I can say it has everything to do with John Oliver’s special on financial advisors and retirement planning.” She says prior to Oliver’s show, “I had no idea there was a difference among financial advisors. My boyfriend (he’s 27) majored in Economics, and he said he had only come across the term in passing.” After watching the show, Knisley took away this lesson: “John Oliver said fiduciaries were pretty much the only type of financial advisor who is obligated to look out for your well-being. That being said, I came away with very positive feelings regarding them and negative feelings towards ‘regular’ financial advisors.”
Ellie Gebhardt, a 23 year-old copywriter for Brand Iron, a millennial marketer, cited the same source of inspiration. She says, “I’ve noticed the uptick of the term fiduciary in pop culture, specifically one episode of Last Week Tonight with John Oliver that aired on June 12th, 2016. In this episode, he and his team uncover various examples of financial advisor shadiness, and give viewers a list of questions to ask at their next financial advisor meeting.” Gebhardt “knew nothing about the term ‘fiduciary’ before the John Oliver show. The show really aired at an ideal time for me, for I was just getting my 401k started at my first job. Our financial advisor came to our office for a day and had individual appointments with each employee. The show really had 3 takeaway points for me. The first was that the term ‘financial advisor’ means nothing, and can be thrown around willy nilly without mandating any professional financial training. Secondly, to ask your financial advisor if he or she was a ‘fiduciary,’ which means that they actually look out for your best interests and act as if it were their money they’re dealing with. Thirdly, John Oliver hit home what fees were associated with financial advisors, and what to look for in terms of a reasonable fee percentage.”
Finally, Natalie Spadola, a marketing associate from Effective Coverage in Albany, New York, says, “I’m a millennial, and I’ve looked into fiduciaries. Here’s why: Late night TV host John Oliver. Check out his segment on fiduciaries: https://www.youtube.com/watch?v=gvZSpET11ZY” Spadola did not know of the term “fiduciary” before the HBO show. She says, “After watching the segment I felt that fiduciaries and what they do isn’t publicized enough. (Part of which may be due to the fact that ‘financial analyst’ or ‘financial planner’ is a lot more appealing title than fiduciary).” The John Oliver Show was contacted but failed to respond prior to the deadline of this article.
After The Discover the Meaning of Fiduciary, This is What Millennials Want to Know Next
Here’s a sampling of some of the follow-up questions the millennials we interviewed asked.
Knisley asks the million dollar question. “Why are fiduciaries obligated to act in your best interest, but other financial advisors aren’t? Do they have a credential program of some sort that differentiates them from the ‘average’ financial advisor? The segment only briefly mentioned them, so all I really know is that they’re financial advisors who cannot put their interests before clients.”
Gebhardt says, “My one unanswered question would be ‘What if you ask your financial advisor if they are a fiduciary and they are not? What options do you have, if any, to look out for your own best interests while planning for retirement?’”
Spadola says, “I’d want to know a good resource to use to find a reputable fiduciary in my area, or what financial planning services from a fiduciary will end up costing me.” Perhaps Liebman can add these questions – and the answers – to her database. In the meantime, click here for another article that answers these questions: “This is What Millennials Really Want to Know About Fiduciary,” BenefitsPro, October 12, 2016).
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