Market Overview

What U.S. financial advisors should learn from Brexit

We spent a lot of pixels – probably too many – discussing how Britain’s split from the European Union isn’t necessarily a bad thing. But it’s not necessarily a good thing either. It’s a risk that a nation of 66 million people took on together.

It would be nice to be able to share your retirement savings’ risk 66 million ways, but you can’t unless you want to split the benefits by the same factor. Fortunately, you don’t have to because you have one advantage over the United Kingdom’s electorate: You get more than two choices.

British voters were asked: Leave? Or Remain? You have an array of 401(k), traditional IRA, Roth IRA and other retirement plans from which to select. Regardless of the plan, you also have any number of funds to buy into that can be fine-tuned to your financial goals, risk appetite, income needs and time horizon. And you have thousands of independent issuers who would very much like for you to consider their equity and fixed-income securities.

Just make sure you also have one transcendently important thing the British didn’t have in 2016: Someone listening.

“Is this thing on?”

We can debate forever whether or not Brexit was a good idea. It would take the United Kingdom out of a bloc that allowed goods, services, labor and capital to flow freely across national borders. Economists around the world and across the ideological spectrum have long agreed that tariffs and other barriers that restrain trade between countries are generally bad.

Generally, but not universally. Regional trade agreements such as Europe’s or North America’s will favor some sectors over others, and people in some industries will benefit while others suffer.

The British government was shocked to learn that not every voter – nor, as it turned out, even a majority – grasped the macroeconomic theory that made E.U. membership a good deal, net-net. But, as Upton Sinclair observed, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

The government didn’t listen to the voters, so the voters turned against the government.

Which brings us to the question: Does your financial advisor listen to you? Do they expect you to just go along and assume that what’s in their best interest is also in yours? If not, you face the same choice as the British voters: Leave or Remain.

“What does that mean?”

Of course your financial advisor should listen to you. Otherwise they won’t understand what your goals are or how much risk you’re willing to take on or what kind of tax treatment you need to optimize for. As the British government found out the hard way, people of different ages, economic situations and family responsibilities have different financial needs.

But an advisor should, by definition, also be worthy of being listened to. If you’re paying them for advice, they should be able to articulate why a particular strategy or an individual investment opportunity is in your best interest.

Yours, not theirs. There are two types of financial advisors: fiduciaries and everyone else. Fiduciaries are bound by law and duty to act entirely in the sole benefit and interest of their clients. Everyone else, to stay within the letter of the law, need only recommend “suitable” investments. By that standard of care, an advisor might reasonably conclude that you ought to put 30% of your portfolio in bonds, but then steer you toward bonds that give you a lower after-tax yield than a fiduciary might recommend.

The difference? A fiduciary wouldn’t steer you toward an investment just because the issuer or underwriter is offering them an incentive to do so. Other advisors might be swimming in conflicts of interest.

Or not. But it is difficult to tell a good non-fiduciary from a self-dealing one. There’s no hard-and-fast rule saying you’ll always get better advice from a fiduciary, because at some point all advice is subjective, but you owe it to yourself to make sure you know the standard of care you’re getting.

Whatever you decide, communication is important. Like the British voters, you need to make sure your advisor is willing to pay attention to you. And, unlike the British government, your advisor needs to make his case in terms you can relate to. That way, whatever choice you make, you’ll know you made it based on the best information available.