By 1995, Pitt decided it was time for a change. The brokerage company he was working for (Dean Witter, now part of Morgan Stanley) was increasingly pushing their brokers to sell higher fee products to their clients. Higher fees meant more revenue for the firm and its brokers, even if the investment didn’t work out for the client (two out of three isn’t bad, went the logic on Wall Street).
Pitt thought there had to be a better way of doing business, one where he could work only for his client’s best interests rather than the firm’s. That’s when he discovered the “fee-only” business model of being paid solely by his clients instead of the investments he used in their accounts. If his clients’ accounts increased in value, he would benefit, and if his clients’ accounts went down in value, he would suffer along with them. As a fee-only advisor, Pitt was also able to hold himself out as a fiduciary, a legal standard that requires an advisor to work in his client’s best interests.
Over the years, P&A has sought to distinguish ourselves in the financial world by being completely transparent. Conflicts of interest exist in all financial advisory business models. Our way of doing business eliminates many of these because we aren’t paid by commissions or the investments we use for you. Since we’re paid only on the assets we manage, any time we stand to gain or lose assets in a transaction, there is a potential conflict. Here are the most common situations:
- Let’s say you have a 401k at an old employer and are deciding whether to roll it over to an IRA that P&A will manage or leave it in the plan. Clearly, we have a preference in the outcome, but as a fiduciary, we must put our own interests aside and do what’s right for you. So to help you make a decision, we will do a side-by-side cost and services comparison of leaving your 401k where it is versus rolling it to an IRA.
- You need a short-term (bridge) loan for a real estate transaction. Two options would be to borrow against your investment account (margin lending) or to sell securities from your account to raise the cash. The advantages of borrowing against your account include no underwriting, competitive rates, and no capital gains tax consequences. One potential disadvantage is that it amplifies the performance of your account–a good thing if the markets go up, a bad thing if the markets go down. An alternative is to sell securities in your account to raise the needed cash, but this carries tax consequences. If P&A placed their interests first, they should prefer to have you borrow against your account. In reality, P&A is held to a fiduciary standard and will put your interests before our own. We just want you to be comfortable with whatever approach you choose.
- P&A has two fee schedules, one for our individual stock and bond accounts (1% annually) and one for our mutual fund and exchange-traded fund (ETF) accounts (0.75% annually). If we were maximizing our own best interests, we’d steer you to the individual securities account. In reality, we’ll have a conversation with you to determine the right approach for your accounts. We do believe there is value in using individual securities in non-retirement accounts that will have $500,000 or more going to stocks. This approach allows us to better manage your tax liability when taking gains and losses compared to a mutual fund strategy. In most other situations, outside of client preference, an ETF or mutual fund approach tends to be more efficient.
The bottom line for us is that being a fiduciary supersedes these and other situations where potential conflicts do exist. We will always act in your best interests and give you advice that is tailored to your unique situation and preferences.
