When a Fiduciary Stops Becoming a Fiduciary

Posted May 4, 2023 By Dan Wagner and Jeff Liautaud

Summary:

If you are an investment fiduciary or a financial professional seeking superior retail investment results, seek a wholesale investment methodology fiduciary that beats the S&P 500 with significant excess returns, and lower volatility. At least one exists.

Business Owners Charter, Inc. (BOC) is not a Registered Investment Advisor, a Broker Dealer, or any entity licensed to sell securities (“Clients”). BOC is a wholesale investment methodology fiduciary for investment firms.

BOC personnel invest their own money in securities that rely on BOC investment research. BOC is a fiduciary to its Clients. The BOC fiduciary duty is a legal obligation to do the same for the Clients as a prudent person knowledgeable in the affairs at hand would do for one’s self.

There are many financial advisors who are forming a business culture that favors ease of work over best in class returns. Take transparency for example. Not being transparent is a slippery slope. It takes a lot of work to be transparent showing investment returns for conservative, moderate, and best in class risk tolerance returns relative to a benchmark like SP500 (symbol SPY). Our measure is consistent at .56 x SPY for conservative risk tolerance, .71 x SPY for moderate risk tolerance, and 100% or 1.00 x SPY for best in class risk tolerance. Our measure never changes over time. That is what makes it consistent.

Offering different portfolios for the same risk tolerance is inconsistent. Measuring overall returns for any one risk tolerance is chaotic unless every for example conservative risk tolerance client invested in identical portfolios. Best fiduciary practices require consistent investment methodology applied not periodically but rather consistently over time. Otherwise any one conservative risk tolerance client for example may have an arguable objection over not obtaining best in class returns for that risk tolerance.

BOC Portfolio takes care of that obligation and permits use of historic documented returns since inception in 2017. The advantage is obvious. All for example conservative risk tolerance clients receive identical returns. There is one exception. It is the risk of the draw dependent upon any initial entry point other than 1/1 for any given year. But once onboard for a full year ending 12/31, for example for a conservative risk tolerance clients returns will be largely consistent. There will always be minor variations due to cash balance, Required Minimum Distributions, and so forth but actual BOC Portfolio across for example conservative risk tolerance clients occurs from identical asset allocations eliminating randomness and increasing consistency and transparency. And proves up best of class returns for each risk tolerance.

If an auditor seeks to understand your investment methodology, how do you explain it? Such referrals to Boc Portfolio become our responsibility to assist your compliance making life easier. Audit requests favor consistent investment methodology especially for fiduciaries.

When an advisor does not want you see returns, an audit risk occurs relative to all other for example conservative risk tolerance clients of yours. So if a fiduciary does not measure returns, the fiduciary status is violated. A fiduciary is required to do for a client what a prudent person knowledgeable in the affairs at hand would do for oneself. Think about it. Consistent, transparent portfolios by risk tolerance make life easier for an auditor.

Some advisors do not wish to undertake, nor should they attempt to undertake, the work required to achieve superior investment results consistently and transparently. A fiduciary cannot know what any client will choose until the fiduciary offers both best of class returns after advisor fees and anything easy to offer. And in their role as a fiduciary, they still need to seek best in class investment returns. Excess investment returns may have outsized significance over other factors including income tax (see Appendix A).

According to S&P Dow Jones Indices, fewer than 13% of funds beat the S&P 500, or symbol SPY. Since inception in 2017 BOC Portfolio Total Returns after advisor fees speak for themselves with higher alpha (excess returns), lower beta (less volatility), and moderate monthly correlation to SPY.

In conclusion, if you are a fiduciary licensed to sell securities seeking superior investment results, consider Business Owners Charter, Inc. Contact Dan@BusinessOwnersCharter.com 708-825-7301.

 

Business Owners Charter, Inc. (BOC) is a wholesale investment methodology fiduciary for investment firms.

 

Appendix A – Tax

 

Appendix A Summary

Given after advisor fee returns of an assumed 10%, compared to an assumed 5%:

  • On after tax accounts, like an outright account, 50% marginal tax bracket would have to be attached to the 10% return before tax efficiency became a factor. In 2023, maximum marginal tax bracket is 37%, a favorable difference on the 10% returns of 13%.
  • On pretax accounts, like 401k or Ira, during a hypothetical 10 year retirement increment, money would run out in 6 years at 5%, compared to lasting the full ten years at 10%.

Excess investment returns may have outsized significance over other factors including income tax.

 

Appendix A – Actual Calculations

Assumed

  1. after tax account
  2. 500,000 start value

Option A – Assumed 

  1. 5% compound annual return after advisor fees.
  2. Assume 20% actual long term capital gains tax bracket on 5% = after tax return = 5.0% x (100%-20%) = 4%

Option B – Assumed

  1. 10% compound annual return after advisor fees.
  2. Assume 20% actual long term capital gains tax bracket on 10% = after tax return = 10.0% x (100%-20%) = 8%.

Problem: How to Solve for X = Marginal ordinary income tax bracket required for taxes to offset excess returns.

Solution: Tax bracket on 10% would have to rise to X%, where X=(5%/10%)-1= 50% marginal tax bracket calculated as follows.

10% x (1-X) = 5% or 1-X=5%/10% or X=(5%/10%)-1= 50% marginal tax bracket. According to College Investor actual 2023 tax brackets are “10%, 12%, 22%, 24%, 32%, 35% and 37%,” much lower than 50%.

 

And that is the worst tax case.

 

Take best tax case pretax account such as Roth or any Ira or any 401k which has no current tax.

500,000 start value

Option B 10% after advisor fees compound annual return.

Compared to

Option A 5% after advisor fees compound annual return.

Lost opportunity cost compounded annually = 5% (10%-5%= 5%).

Over 10 yrs that lost opportunity cost amounts to 5% raised to the 10th power = (163%-100%)=63%

Losing 63% of your money over 10 yrs is a lot of money.

For a retired couple who needed 500,000 to live in ten year increments under Option B, using the above assumptions Option A would result in running out of money in 6 years as follows.

Option A

(500,000 x 1.05^10/ 500,000 x 1.1^10) x 10 years= (163%/259%) x 10 years = 6 years. Running out of money for the retired couple in 6 years is a huge problem compared to having enough money to last for each ten year increment.

Excess investment returns may have outsized significance over other factors including income tax.