The Strategic High-Income Trust

by Jeff C. Johnson

Stock market performance

This is a story about a fictitious investment product. The investment does not exist. And while this story is based on the real world, there is no security called a Strategic High-Income Trust, at least not to my knowledge, and if there is actually such an investment, the following does not pertain to any specific product.

To begin, I’ll share an observation. There is a growing discussion and debate in the media and in the financial services industry about the standard of care and advice that an advisory or investment firm offers clients and customers. 

Broadly speaking, there are two standards. The first is called “suitability,” which means that the investment sold to a client is generally appropriate for that client. The second is called “fiduciary,” which means the recommended investment is the best possible investment, at least based on known facts. A fiduciary is required to make recommendations in the client’s best interests, with the client’s total situation in mind.

There’s a lot more to this conversation, but for the purposes of this short post, that’s all I will cover here. A short internet research will yield a trove of information on this topic.

So, how can a regular investor really know what the standard of care offered by their “investment person” is?

A simple way is to consider how an investment finds its way into your account.

If your investment professional calls and explains a new investment idea, has some detail about how it works, asks you to buy it, and, when you agree, you are charged some kind of commission, sales load, or markup … then this is very likely covered by the suitability standard. You are the “customer” of an investment firm and your “adviser” is a broker or salesperson, no matter what important title is on their business card. A commission was either charged or built into the product, and part of that commission was paid to the broker-salesperson.

However, if you discuss overall strategy with your investment person and together you develop a goals-based portfolio in a more comprehensive manner, and you pay a defined fee for advice … it’s more likely your firm is a “Registered Investment Advisor” and subject to the fiduciary standard. You are a “client” of the firm, and they have the duty to do the right thing, not just the generally suitable thing, for you. You probably signed an agreement with the firm in which they accepted this fiduciary responsibility toward you.

After 35 years in the industry, I have lots of friends and many former colleagues who have worked at investment firms across the spectrum (many of which have been sold or merged out of business). When one now-defunct, revenue-driven investment firm created a new “hot idea” primarily for the purpose of generating sales commissions, an old friend of mine would laugh and call the new product another “Strategic High-Income Trust.”

He would lump all unproven, expensive, complicated packaged investment products in this Strategic High-Income Trust category, a thinly veiled reference to what he thought of these high-sales commission generators. (Consider how you would abbreviate this investment using an acronym!)

If you’re an investor, maybe you’ve felt like you have been sold a few of these investment products.

Bottom line: Why would anyone want to work with an adviser who's not a fiduciary?