Fiduciary Standards

‘Fiduciary’ vs. ‘Suitability’

Browse the financial headlines and enormous rewards seem within reach. “Five stocks that will boost your portfolio,” reads one headline of a prominent financial news site. “The 10 stocks you don’t have, but need,” screams another, “The only stock that will matter in 2017,” declares a third. Judging from the headlines, achieving financial success requires just a few quick stock purchases of who’s hot, and who’s not.

Obviously, sometimes, the stock market is wrong.

 “I am embarrassed by the financial industry. It is treacherous and the systems are set up to profit the industry titans at the unneeded expense of the everyday man,” said Gary Sipos (MBA, AIF), founder of Sipos Financial and Insurance Services. “My company is helping people understand what happens in the back room and how to turn the tables on the financial industry and make it work for you.”    

Sipos Financial and Insurance Services provides financial planning, tax-shielding of income, college cost reduction, asset protection, and retirement planning to clients who realize the game is rigged against them. Open-minded clients willing to take a look at financial planning methods not seen in Money Magazine are Sipos’ target market. The firm does not have a minimum to invest, Sipos said.

 Sipos’ unorthodox approach can be seen in his view of 401k plans.

 “Everyone loves 401k plans,” Sipos said in a recent interview. But the demographic shift toward a population that skews older, and has fewer children, has strained the current tax model, he added. Meanwhile, retirees often lose several tax deductions after paying off properties or reaching other financial milestones.

“Essentially, when you look at all those [demographic] numbers you see that tax rates eventually have to go up,” Sipos said. “Now when you retire, you have much fewer tax deductions at a higher tax rate, it means you’re going to lose the 401k game.”

Sipos, a millionaire start-up founder and best-selling author, knows what losing a financial game feels like. A former engineer who worked as a designer on the Army’s AH-64 Apache helicopter, Sipos left engineering to found several tech companies – some of which, in his words, “crashed and burned,” and others were “IPO’ed and M&A’ed.”

 Start-up success brought a “pile of money,” which Sipos entrusted to the big names on Wall Street to protect and grow. They failed. Sipos roughly half his wealth to a major market downturn, he said, and the experience prompted him to take charge of his own finances.

“When you lose money in the market, even though it comes back, you still lose money, and the opportunity cost,” Sipos said.

SiposSipos Financial and Insurance Services treats its clients as a fiduciary, meaning their interests come first. That’s a different “game” from advisors who follow the “suitability” principle, which allows them to steer clients toward products with higher commissions, so long as the client gets a solid return – which may be weaker than other products – as well.

“Nine hundred and ninety-nine prospects out of 1,000 that come into my office, maybe, understands fiduciary versus suitability,” Sipos said. “I’m in favor of applying the fiduciary standard as widely and broadly as possible.”

The fiduciary standard currently remains in limbo. The Department of Labor established a fiduciary standard regulation late last year, but the Trump administration halted implementation and asked the department to review the new rule’s impact on financial advisors. Many industry observers expect that the rule will be scrapped altogether – a DOL memorandum directs department personnel not to enforce the rule until further notice.

While some critics contend that the fiduciary standard was an undue burden on some financial professionals, such as insurance brokers, Sipos believes that even the term “financial advisor” can be misleading. The fiduciary rule is needed so that investors can understand just what an “advisor” is, and whose interests they have in mind.

“Unfortunately, the word financial advisor is extremely mushy … I’d rather see that tightened up a lot, to see that if you are a financial advisor then you do what’s in the clients best interest,” Sipos said.

Even when financial professionals claim to put the client first, they often use cookie-cutter approaches to allocate assets that leave the investor worse off. Sipos knows, because that’s how the Wall Street megabanks lost so much of his money – by running it through a few formulas and allocating percentages of it to different stocks, market sectors, and other products.

“The financial industry is focused on chasing the hottest stocks,” Sipos said. “Many financial advisors are just glorified stock-pickers chasing after rate of return.”

Companies operating under the suitability principle make their money through transactions, the higher the volume, the better. But, for clients, Sipos said the key is to focus on financial processes. Suitability firms are always chasing the “what of finance,” whereas a fiduciary looks at the “how.”

“Applying the appropriate financial process can swamp rate of return,” Sipos said. “The process of how you fund your 401(k), the process of how you pay your mortgage, the process of how you save for college all have a huge impact on your retirement income.”

The financial industry needs to fundamentally shift away from the stock-chasing mentality, Sipos said, adding that putting clients first should be required across the industry, not just from stock-brokers.
Sipos treats each client as a unique case. Every client is provided with a customized financial plan, and is shown several “horse races” – basically, alternative scenarios about how their wealth will develop based on their actions. It’s an approach more advisors should adopt, he said.

“They should be focusing on asking, ‘What financial processes and strategies can I employ that will have strong downside protections?’” he said.

Sipos’ unorthodox methods come from his interactions with the “Hoover Tower” at Stanford University. Sipos studied artificial intelligence at Stanford and later returned to the campus after his personal wealth took a beating – he describes his entry into financial advising as being driven by “true desperation and need” – to better understand why his losses had been so heavy. Through conversations at the Hoover Tower with the leading economists of the day, Sipos sharpened his views on finance, the market, and how to manage money.

Sipos’ views on everything from stock-picking to long-term care protection were shaped, to some extent, by his interactions at Stanford’s Hoover Tower. He takes a customized approach to each client, but his focus is always on the financial process, not the latest fad product.

Long-term care presents a major obstacle for investors, he said. Sipos cited a Department of Health and Human Services report that stated 70 percent of Americans will need long-term care if they live past age 65.
“I wouldn’t want to get on a plane that had a 70 percent probability of crashing,” he said, adding that long-term care insurance can be an expensive burden.

“Using financial processes that leverage powerful concepts such as uninterrupted compounding, tax-free growth and tax-free distributions … makes planning for retirement much easier and provide for long term care without having to directly purchase long term care insurance” he said.

Educating clients on long-term care, education savings – Sipos wrote the best-selling College Cash Solutions, and was co-author of the best-selling Masters of Success with renowned self-development author Brian Tracy – and investment management is something Sipos said he looks forward to. He said several of these workshops number among his greatest successes, because he showed people how financial processes can impact their lives.   

Sipos said his goal for 2017 is to find a way to reach even more families.

“I let the numbers to the talking,” he said. “Most of the time a simple adjustment will have a significant positive impact on their financial lives as they are losing money between their fingers but they don’t realize it.”

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