The end of the second quarter is always a relief for me because for the past six years, it has meant that we are finally through getting our CEFEX certification.
As you probably already know, we serve our clients in a fiduciary capacity, which means that we are required to act in the best interest of our clients. You may think that everyone in the financial services industry has to do that, but that’s not the case.
A traditional stockbroker, for example, is held to what is called a ‘suitability standard,’ which means that their recommendations have to be suitable for the client. That sounds reasonable enough, but that standard leaves the door open for things that we think investors don’t like.
Under the suitability standard, a broker isn’t required to disclose conflicts of interest regarding a recommendation or explain how the broker is compensated.
Here’s an insidious example of how that could play out: the Rydex S&P 500 Index Fund C-Class (RYSYX) mutual fund could be perfectly suitable for a client based on their age, income and investment objectives.
That fund, however, charges 2.32 percent per year to track the S&P 500 and you can buy the same thing for as low as 0.05 percent. As you might expect, the fees on the Rydex fund have hurt returns.
In the three years that ended yesterday, the S&P 500 was up 17.59 percent. An index fund that charges 0.05 percent (I can’t name names since it’s on our Approved List), was up 17.56 percent while the Rydex fund only made 14.80 percent during the same period, according to data from Morningstar.
A fiduciary could NEVER recommend the Rydex fund because it is clearly not in the best interest of the client, even if the strategy may be suitable.
Obviously, not every broker does this – not even close. There are a lot of good brokers out there who do the right thing, but we think it’s far better to serve clients under the highest standard of care.
We’ve operated as a fiduciary since day one almost 13 years ago. Six years ago, we wanted to make sure that were doing everything we could to get this right since it’s so important in building trust, so we hired an independent analyst to make sure that we are and had that certified by the Center for Fiduciary Excellence, or CEFEX.
Every year since then, the independent analyst does a full review of our business and I can tell you that it’s not a rubber stamp or inexpensive. They evaluate our policies and procedures, spot check client files for signed Investment Policy Statements, look at our Investment Committee meetings and generally put us through the wringer.
Next year, it will be even better because we recently hired a full-time compliance officer who will work on getting us re-certified.
If you’d like to see our registration information or the most recent certification, please click here.
Every year, I complain about going through the process and every year, I’m glad when it’s done and proud that we’ve done it because it’s the right thing to do. I also promise myself that I won’t complain as much next year, and with our new compliance officer, it may actually happen next year.