Book Review – “The Fiduciary Formula” by Josh Itzoe

Daniel Yerger Uncategorized Leave a Comment

Disclaimers and Disclosures: As of this writing, I am the owner of a Registered Investment Adviser Firm offering ERISA Plan Fiduciary services, and this represents a conflict of interest in that anything Mr. Itzoe has written in the book that better aligns with what I do, I am likely to tout, and anything that varies, I am likely to critique. I have done my best to be objective, but this warning should be kept in mind.

Bottom Line Up Front

I would give The Fiduciary Formula by Josh Itzoe 3.5/5 Stars if I were a more prominent reviewer with a long history of writing reviews (I’m not), but that’s more or less where the book lays. Simple question: Would someone who knows nothing about 401(k) plans but will be responsible for one be better off having read this book? Yes. Will they be objectively the most well armed to handle all questions concerns and considerations while easily differentiating facts from advertisements? No. If you want to know more about how and why, read on.

Technically Correct

The book is spot on with technical issues. The right codes, regulations, items, and credentials are all brought out and I found no issue with how these items were written. Someone using this book as a guide to ensure they’re getting a fundamental grasp of the technical issues in a 401(k) plan will be well supported by this reading.

Academic Smoke Screens?

Mr. Itzoe does an interesting hat trick in the book. He often prefaces chapters and sections with anecdotes about studies or research unrelated to 401(k) plans and draws a leading conclusion with them, being careful to provide a citation for the story or study. He then will make future academic or “research-based” claims later on in the section and call back to the preface research but will not actually substantiate the claims. Examples include a call for telemedicine-style financial planning to be offered, which has literally never been studied by anyone (I would know, I watched the first comprehensive literature review presentation on the subject just last week at the FPA Annual Conference, which is often the first step before exploring the topic further.)

This is an Infomercial

As with most advisor-written books, the book is littered with unsourced or unverified claims and anecdotes regarding what Mr. Itzoe’s firm has done for clients. This is almost certainly a violation against the securities rules regarding testimonials and performance of services claims, but I’ll give a bit of a pass here because many of the anecdotal problems they’ve solved are similar to problems I’ve seen in the real world and I can sympathize with wanting to share the story of people getting ripped off, given enormous lists of investments, excessive fees, and so on. However, at the same time, the book is littered with lead generators and pitches for assorted services and platforms that his firm offers. One particularly questionable actor is an expense benchmarking platform that costs more than any other such platform I’ve seen and that he touts as the first of its kind, despite being entirely un-unique and a late entrant to the area of expense benchmarking (which has been comprehensively offered by many firms such as Envestnet, Fi360, and others and at a much more reasonable price.)

There is no Fiduciary Formula

Despite a neat marketing name and an early explanation of the value of the formula, there is no actual formula here. I’m not sure if Mr. Itzoe recently saw another firm with branded periodic-table-type marketing and thought he’d take a swing at it, but the “Fiduciary Formula” is just end-of-chapter headers to the notes and takeaways from the section. There is never an attempt to combine the elements of the formula or draw out an equation, process, or model from the elements thereof. Rather, it’s simply an early hat trick that more or less becomes irrelevant throughout the reading.

Some Razor Sharp Points and some Dull Ends

Mr. Itzoe does a tremendous job of giving ample criteria in the selection of service providers, including deep-dive critiques of Recordkeepers, Auditors, Third Party Administrators, and helping identify critically important elements to avoid or account for in the process of selecting vendors to assist in the administration of the plan. And then there’s the selection of Fiduciary Investment Advisers which takes a hard turn. Where the critiques of all other provider functions are extremely on point and well thought out, the critique for Investment Advisers is much more clearly designed to steer the reader toward his own firm or firms like it, including unrepeated criteria for other providers, such as that the Investment Adviser should have at least 100 ERISA plans under advisement (a very small pool of large providers), be fee-only (which I agree with in spirit but is not necessarily a law of exclusion), and that they should offer a number of tertiary services that further narrows the potential candidate pool down to a tiny handful of options. Summing it up, while people will be well informed by the guidelines for other providers, this section requires more than a few grains of salt.

Opinions or Facts?

Finally, a more general critique. Because of the aforementioned academic smokescreen and infomercial component, the book is broken up in a way that makes it hard to differentiate facts from opinions. For example, while there is data regarding the adoption of QDIAs and favoritism toward Target Date Funds, there is never any research-based or academic backing for the claims that follow from this initial point of favoritism. This habitually repeats throughout the book, where a snuck premise such as TDFs being the most important part of the plan will come back over and over again, reinforcing the idea in the mind of the reader while never being fully substantiated.

Wrapping it all up

If you are a layperson looking for a guide to how to be a decent plan sponsor, you could do worse than this book. If you are an Investment Adviser or other service provider for 401(k) plans, you’ll probably spot the same advertisement-over-facts parts that I did. Ultimately, any reader is not going to be worse off for reading this book, but the secret to fiduciary 401(k) management is not found in The Fiduciary Formula.

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