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February 15, 2017

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Jack Sparrow is a swaggering pirate played by Johnny Depp in the “Pirates of the Caribbean” movies. As a pirate, Sparrow is in the business of profiting at the expense of others, so it is a bit of a role reversal for his portrayer to claim in a lawsuit that he has been victimized by his financial advisor.

Celebrities being ripped off by financial advisors is nothing new, but as the New York Times pointed out recently, Depp’s case is especially interesting in light of a revived debate over what’s known as the fiduciary rule, which is designed to make sure financial advisors have their clients’ best interests at heart.

While TIGER 21 Members may live less extravagant lifestyles than Depp (who reportedly spent $30,000 a month on wine) their finances are often complex enough for them to rely on a variety of different advisors. A crucial step in avoiding trouble with those advisors is to clarify what their roles are.

A reminder to impose this type of formal structure around advisory relationships is generally valuable because such relationships often evolve incrementally in a way that can leave some ambiguity as to legal status and responsibilities. And, that reminder may be especially timely now that the regulatory view of such relationships may be on the verge of changing.

Are Your Advisors Fiduciaries?

In essence, the fiduciary rule says that professionals giving financial advice must do so acting in the best interests of their clients. So, for example, they should recommend an investment product because it is the best fit for the client’s needs, rather than because it pays the highest fees.

That principle is both admirable and straightforward in theory, but it gets murkier in practice. For example, the advice of attorneys or accountants might have financial implications, but coming in the form of legal or tax advice it may not necessarily fall under the fiduciary rule.

Further muddying the waters is talk that the Trump administration will roll back the client protections of the fiduciary rule. This may mean that several classes of financial advisors would no longer be deemed to be acting in a fiduciary capacity.

There are a couple steps you can take to clarify the nature of your advisors’ relationships with you. The first is to ask them if they consider themselves a fiduciary to you, and the second is to require them to acknowledge that fiduciary responsibility in writing. That acknowledgement should specify the scope and extent of the advisor’s responsibilities.

In other words, rather than relying on a general – and possibly shifting – definition of responsibility laid out by the law, you can more specifically and bindingly define those responsibilities contractually.

The Limits of Fiduciary Responsibility

With that said, it must also be acknowledged that there are some limits to fiduciary responsibility. Keep in mind the following:

  1. Advice may be well-meaning, but not necessarily the highest quality. Simply having an advisor act faithfully as a fiduciary does not mean all your financial needs will be met. You need to be able to qualitatively and quantitatively assess the value of the advice being given, both before hiring an advisor and then periodically throughout the relationship.
  2. Fees create the potential for a variety of conflicts. A catch-phrase to come out of the 1970s Watergate scandal was “follow the money.” That remains good advice for anyone hiring a financial advisor. Regardless of their fiduciary status, if you insist on full disclosure of all their sources of compensation related to your money, you can get a clear enough picture of the advisor’s interests to judge whether they conflict with your own. In Depp’s case, the financial advisor allegedly earned $28 million from the actor’s accounts over the years. Never mind the underlying fortunes involved, the fees alone in financial management can make it a high-stakes game.
  3. There may be a gap between the advice given and how you follow it. In the Depp case, there is some dispute whether bad advice or his insistence on ignoring advice in favor of an extravagant lifestyle caused his financial problems. A key distinction is between discretionary and non-discretionary advice. Giving someone discretion to make financial moves on your behalf means giving up more control, but it does create full accountability for that advisor. Non-discretionary advice that leaves the final decision up to you means that you impact the results through which advice you choose to follow and how timely your decisions are. This can leave accountability somewhat murkier, but it can help to thoroughly document all recommendations, with a notation of when they were made and at what prices (if applicable). That will give you a basis for evaluating the quality of the advice you got, separate from the ultimate impact of how your decisions about following the advice affected the results.
  4. Suing over financial mismanagement is a lousy recourse. Keep in mind that even if your advisor has fiduciary responsibility, largely what that legal protection does is give you the right to pursue recourse in the courts if things go wrong. That is a time-consuming, expensive, and uncertain process. Rather than rely too heavily on the safety net afforded by fiduciary responsibility, it is better to try to avoid trouble in the first place by being rigorous in your selection of advisors and vigilant in your evaluation of them. In Depp’s case, the complaint covers actions taking place over a period of sixteen years ‚Äì that’s a long time to let things go simply on the assumption that the advisor is legally obligated to act in your best interests.

In large proportion, TIGER 21 Members are self-made men and women whose financial status has progressed dramatically over a relatively short period of time. It may be especially important for people in such a fast-changing environment to take some time to formally evaluate and structure their advisory relationships. An underlying principle of the group is to benefit from the value of Collective Intelligence¬Æ, wherein Members learn from both formal presentations and informal exchanges about the experiences their peers have already been exposed to. If Johnny Depp had been sharing his financial situation with a group of unbiased financially savvy peers, would he have ended up in this position? Even if Johnny Depp wasn’t able to recognize the warning signs, a group of equally successful Members may have had perspective, and experiences that would have been relevant and could have protected him.

As any good business manager knows, effective delegation means handing off the performance of specific functions but not the ultimate responsibility for managing and monitoring those functions. Defining the exact roles, financial incentives, and performance metrics of your financial advisors can help you get the best use out of those professionals.

The life of a pirate like Jack Sparrow may be prone to ups and downs with treasure being captured and then lost again. Entrepreneurs who have spent years accumulating their fortunes are typically less cavalier than that about preserving their wealth, so clarifying the roles of your advisors is a good way to steer clear of financial pirates.

Barbara Goodstein SignatureBarbara GoodsteinPresident & CEO of TIGER 21