The Switch

In so-called “investment fiduciary” training of investment advisors by the likes of fi360, the payoff for the investment advisors and for Wall Street comes in the switch — the actual placement of the investor’s money.

Fi360 trains and arms “investment fiduciaries” to make it appear they are placing the investor’s money in asset classes with long histories and widest diversification. But instead they are trained to switch the placement of the investor’s money into picks from the Wall Street casino full of riskier gambles with more taken out for higher fees.

The setup

For the setup, selection of an investor’s allocation, investment advisors are trained and armed to use asset classes, defined and measured by indexes, which have two great advantages for minimizing risk:

Decades of return-rate history, for estimating future-result probabilities. For the asset-class setup. fi360 uses over 40 years of return-rate history.

Diversification among hundreds of investments, to minimize danger from bad performance of any one company or investment manager. For example, the fi360 asset class of International Equities is defined by an index with over 900 companies.

Investment advisors are trained to guide an investor to a selected mix of these asset classes.

For each selected asset class, the obvious place to put the investor’s money is to invest it in that asset class — in an index fund or ETF designed to match the future performance of that asset class.

The switch

But instead, fi360 trains and arms investment fiduciaries to make the switch – to place the investor’s money in picks from the Wall Street casino full of thousands of less-diversified shorter-history bets within the asset classes, with greater risk and higher fees.

To try to make this switch appear responsible, fi360 provides investment fiduciaries something complicated called “The fi360 Fiduciary Score.” But basically what it does is lead investment advisors to abandon the asset-class standards:

Abandoning the historical-evidence standard – Instead of over 40 years of history for an asset class, the Fiduciary Score approves betting an investor’s money on an investment management team with only 2 years of history.

Abandoning the diversification standard – Instead of asset classes diversified among hundreds of investments, such as the International Equities with over 900 investments in different companies, the fi360 Fiducio Score approves betting an investor’s money on as few as 1 investment manager.

This abandonment of the risk-reducing standards of asset classes is so shocking it has to be visualized, on a pair of graphs:

SwitchE

This abandonment of the risk-reducing asset-class standards opens the floodgates for investment advisors to place an investor’s money in any of thousands of picks from the Wall Street casino with greater risk for the investor.

And for the investor, there’s another disadvantage: more of his money is taken out for fees and other deductions.

The payoff

Compared to investing in asset classes with index funds or ETFs, most of the thousands of bets in the Wall Street casino have higher fees and other deduction taken out of the investor’s money for Wall Street. For investors, this smothers compounded investment growth, which can reduce an investor’s long-term results by a quarter, a third, even by half.

But for Wall Street, taking those higher fees and other deductions, it’s the payoff from the switch.

To hide this disadvantage for investors, the fi360 Fiduciary Score leads investment advisors to compare those high fees and other deductions with high fees and other deductions of other picks in the Wall Street casino, instead of with the lower fees of investments in asset classes.

To make the thousands of potential picks in the Wall Street casino appear worthy, for the switch from the client’s chosen asset classes, fi360 uses a code word for them: “peers.” In its “Fiduciary Score” system, fi360 offers and calls for any proposed “peer” to be compared in ranking with other “peers” — compared in a population of picks from the Wall Street casino that have been let into consideration by dropping the historical performance and diversification standards down to nearly zero. Of course, any “peer” considered for the switch should be compared with the asset class investment which the “peer” is proposed to replace — compared in length as well as quality of past performance, and compared in fees and other deduction from the client’s money. “Peers” will not pass.

For investment advisors, as well as Wall Street, the switch has a payoff. investment advisors can point to the thousands of bets in the Wall Street casino as an excuse for the size of the fees the advisors take out of investors’ money for themselves.

Anti-fiduciary, and dishonest

In many cases, investment advisors can guide best execution of a client’s investment in his chosen asset classes. For example, for a client with multiple accounts subject to different taxations, placing investments in different asset classes in the different accounts in a way that minimizes the client’s taxes.

Occasionally, an investment advisor may think that it’s best for the client to deviate from investment in a selected asset class. In such a case, the advisor should clearly reveal the proposed deviation as a deviation from investment of the client’s money in his chosen mix of asset classes, explain the reason for the deviation, and present a full comparison of the deviation investment with the asset class investment to be deviated from, in quality and length of performance history and in fees and other deductions.

But instead, the likes of fi360 train and arm investment advisors to standardly execute the switch, into investments that are not investments in the client’s chosen asset-class allocation, as if it were faithful investment in the asset classes of the client’s chosen asset-class allocation – which it is not.

In most cases this is irresponsible, increasing the client’s investment risk, or fees and other deductions, commonly both. In most cases it is anti-fiduciary, adverse to the client while more favorable to Wall Street, or to the advisor himself, commonly both. And in every case it is dishonest, representing as faithful investment in a client’s chosen asset-class allocation placement of the client’s money that is not.

The scariest thing

Apparently, at the Institute for the Fiduciary Standard, the people preparing the proposed “best practices” for investment fiduciaries approve of the investment advisor training provided by the likes of fi360, including the switch.

The proposed “best practices” for investment fiduciaries lead investment advisors to carry out the switch:

Proposed “best practice” #10 requires investment advisors to have lots of Investments (picks from the Wall Street casino) to use in place of asset classes. (Instead, for each asset class, in most cases they need one investment in the asset class.)

And proposed “best practice” #11 leads investment advisors to compare the high fees and other deductions of those picks with the high fees and deductions of other Wall Street picks. (It should instead lead them to compare the high fees and deductions of those picks with the lower fees of investments in the asset classes.)

We need real fiduciaries to stand up and replace these proposed “best practices” – replace them with practices that are really best, designed to fulfill the fiduciary standard of guiding investors in the investors’ best interests.

If instead the present proposed “best practices” are established, the benefits of the fiduciary standard will go to investment advisors and Wall Street instead of investors.

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