Your Advisor Should Be Like A Top Doctor

October 27, 2014

Having A Plan B

Good doctors also recognize that sometimes they just don’t know which treatment path will deliver the best results. They educate the patient on why they are following a specific plan. But they also let their patients know ahead of time what Plan B—and even Plan C—might be if the first course of treatment doesn’t deliver the desired results.

The same thing should be true of a financial advisor, because no financial advisor can predict the future. At best, like the doctor, advisors can only estimate the odds of a plan’s success. And just like the doctor, advisors should have a Plan B ready ahead of time.

You should put into writing what actions you will take if the “left tail”—the bad outcomes in the potential distribution of returns—occurs, as it did in 1973-1974, 2000-2002 and again in 2008.

Act In Your Best Interest

Doctors are required to follow the Hippocratic oath, in which they swear to practice medicine honestly. The original version required the doctor to always do what is best for the patient, rather than what is best for the physician. You would never consider using a doctor who didn’t act solely in your best interests.

Similarly, you should only work with a financial advisor who provides a fiduciary standard of care. The fiduciary standard is the highest standard of care under the law, requiring the advisor to give only advice that is in your best interest.

Most financial advisors, however, provide only a suitability standard of care, which merely requires them to give advice that is “suitably” consistent with your investing objectives. There’s simply no reason ever to work with an advisor who will not offer the fiduciary standard.

Acting in your best interest requires the doctor to avoid conflicts of interest. That is why physician groups cannot be publicly traded securities—there would be a potential conflict between duty to patients and duty to shareholders.

Similarly, doctors in the U.S., unlike in some other countries, cannot own pharmacies—there would be a potential conflict between a patient’s best interest and a doctor’s financial interest in overprescribing to line their own pocket.

The parallel between a doctor pushing medication for her own profit and a broker pushing his firm’s financial product, also for their own profit, is striking. Yet such “advice” is allowed under the suitability standard.

The Hippocratic oath also requires physicians to abstain from doing harm. The analogy to investing is that financial advisors should avoid recommending speculation that can lead to irreparable damage.



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