Wednesday, February 25, 2015
Rental Golf Clubs are Suitable
by Steve Haberstroh, Managing Director
My golf trip to Florida is only one month away. Those of you who live in the Northeast can appreciate my excitement. Weâ€™ve earned it!
I always bring my own clubs when I travel, regardless of how cumbersome it can be. Sure, I run the risk of clubs getting scratched, broken or â€œlost,â€ let alone paying additional baggage fees. But if I am going to play tough courses, I want to score well. And to score well, better equipment gives me a better shot at success.
Most courses I play have decent clubs for rent. Sure they will work, but theyâ€™re never as good as my own. They are usually too short for me—less distance. The shafts generally are too flexible—more hooks and slices. The driverâ€™s loft is generally too steep—less roll in the fairway. And I would have no feel with the putter. Simply put, theyâ€™re suitable. I wonâ€™t always shoot better scores with my own clubs, but it gives me the best chance at success.
Within our industry, there is much debate about the Fiduciary Standard and how it compares to the Suitability Standard. And this debate has now reached the White House. Last week at an AARP event, President Obama came out in support of expanding the Fiduciary Standard to cover all brokers and financial advisors. Of course, Wall Street is pushing back.
SEC and state Registered Investment Advisors (RIAs) are held to a “Fiduciary Standard” while most other advisors or brokers who, in general, work for large major banks or wirehouses are only required to adhere to the “Suitability Standard.” So what exactly is the difference between the two? Under which standard is the client better off?
Fiduciary Standard: Advisor is always required to put the clientâ€™s best interest ahead of their own interests—especially when it involves remuneration.
Suitability Standard: Advisors must sell investments that are suitable given a clients risk tolerance, time frame and objectives. They are not required to put the clientâ€™s interest first. In this regard, an advisor may select an investment for a client which pays him or her a higher commission over a similar investment with lower fees.
Last year, we were hired by a wealthy family to analyze their portfolio at a particular investment bank. Letâ€™s call it Big Bank. One of the several “red flags” we noticed, had to do with a particular gold fund held in the portfolio. Over the last decade, gold has been a very popular investment. One of the most popular and cheapest ways to invest in gold is the iShares Gold Trust (ticker IAU). It trades several million shares a day, carries an expense ratio of 0.25% (which is cheaper than its larger counterpart GLD) and is backed by gold bullion held in very large, secure vaults. So why did the client own a smaller boutique gold fund despite the fact that it was 15 basis points more expensive than IAU? Both funds are backed by gold. Does the boutique fund hold â€œbetterâ€ gold? I doubt it ...
We decided to dig deeper. Itâ€™s our job. Turns out, the boutique fund was issued by-you-guessed-Big Bank. When did the client purchase the fund? You guessed it ... on the fundâ€™s issue date. Did the advisor just coincidentally think gold was a good investment on the very day this fund was issued? Iâ€™m skeptical.
IAU does the same thing and costs 15 basis points less than the fund the advisor selected. On a $1 million position, the client would save $1,500.00 per year owning IAU. Thatâ€™s a brand-new set of golf clubs every year!
Under the Suitability Standard the advisor did nothing wrong. The boutique fund fit the clientâ€™s risk tolerance and time frame. This scenario, however, would fail the Fiduciary Standard. Unless there is some added value for holding the boutique fund, the client would be better off with IAU. Same underlying asset; same performance; lower fees. Since the client did not specifically ask for the boutique brand the only reasonable explanation is that the broker decided on the boutique fund to earn a more substantial commission or was otherwise incentivized.
Just because a broker operates under the Suitability Standard does not mean he or she is doing something wrong, or is incapable of giving great advice. Likewise, RIAs acting under the Fiduciary Standard donâ€™t always give the best advice. However, I would argue that the Fiduciary Standard is a win-win for both the client as well as the advisor. It fosters a relationship built on transparency and trust.
So next time you speak with your advisor, ask a simple question, “Do you operate under the Fiduciary Standard? Are you willing to put it in writing?”
I will keep you posted on how my golf trip goes. I expect to win the majority of my matches. Rumor has it that the other guys will be using rentals ...