The Client’s Best Interest

The financial services industry often gets a bad reputation and some of my personal experiences justify that sentiment. One such experience occurred back in the summer of 2011. The economy was still in the early stages of recovering from the financial crisis and the Federal Government was facing a potential shut down. As a consequence the stock market was experiencing some fairly drastic moves.

Personally I was having trouble dealing with the turmoil that the market was experiencing. I scheduled a meeting with a representative of the bank where I held my Roth IRA for a brief review of my account. I wanted to temporarily move a portion of my money into a safe, stable asset. At the time I had started to learn about long-term investing and asset allocation–so this was somewhat of a trick question on my part. Here’s how the conversation went

Me: Like we discussed on the phone, I’d like to move some of my money into a more stable asset for the next few months. At least until the market calms down.

Representative: That’s understandable we can do that.

Me: I’m really conscious of fees and I don’t want anything with front-end or back-end charges.

Rep: That’s fine. I have a fund I recently used for another client. She wanted to put her money into a safe asset as well

Me: OK

Rep: The fund is mostly composed of Credit Default Swaps. Do you know what those are?

Me: I’m not too familiar with those, but I kind of know how they work.

Rep: They’re essentially insurance contracts and they’re pretty safe. The fund doesn’t move around a whole lot but at the same time it doesn’t provide much of a return.

Me: OK, that sounds good

Rep: The President is giving a speech next week. We should probably think about making a move in the next few days.

Me: Give me a day or two to think about it, I’ll get back to you.

Here’s my post-mortem on the conversation:

Conflicts of Interest
While not obvious from the transcript above, the fund shown to me was managed by the same bank that employed the representative. I don’t know this for a fact, but if I had to guess the representative was probably compensated in some way for promoting and selling his bank’s funds. If this were true his incentives were working against me and not in my best interest. Furthermore I wasn’t presented with any additional options. A clear lack of fiduciary responsibility.

Lack of Transparency
The fund presented to me was composed of a number of esoteric Credit Default Swaps (CDSs). What’s important to keep in mind is that these instruments are difficult to value. They are nonproductive assets in the sense that they produce no goods or services and generate no profits. They’re essentially bets, or as the representative called them “insurance contracts.” Without an understanding of what the fund was actually insuring or betting against makes it difficult to judge how safe it actually was. More importantly…why? Whatever happened to basic bonds or Treasuries?

A Sense of Urgency
This is a sales tactic that I’ve seen used in a number of areas. I was told that President Obama was giving speech next week and I needed to act quickly with no real explanation as to why. Keep in mind I was 28 years old at the time and I’ve got a 35+ year time horizon before I retire. What happens in the next week is unlikely to impact my long-term outcome.

What I ultimately took away from this situation was how to vet a financial adviser. A true adviser, in my opinion, should work in the best interest of their client–they abide by a fiduciary responsibility. True advisers will at the very least hold a Series 65 certification. Additionally, advisers with more experience typically hold either a CFP or AIF certification. Both of these standards require a combination of education, exams and experience to achieve this certification.

Oh, the answer I was looking for was a simple low cost short-term bond fund, or better yet short-term Treasury Bills purchased directly from the US Treasury. Neither of these options came were mentioned by the representative. Both are easily accessible to individual investors through a discount brokerage.

Certified Financial Planner (CFP)
Accredited Investment Fiduciary (AIF)

UPDATE January 17, 2016
The Securities and Exchange Commission recently fined the bank I referred to for failing to disclose conflicts of interest to it’s clients. I can’t be certain, but it’s possible that the above situation may have been an example of these accusations at work. The full press release can be viewed at