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The Fiduciary Standard-It’s All about Expectations


The issue of who is and who isn’t a Fiduciary has been in the news a lot this year. The recently passed Dodd-Frank law requires the SEC to deliver a study about differences in the oversight of Registered Investment Advisors and Broker-Dealers to Congress in January. After that the SEC will be charged with developing rules that govern the standard of care due to individual investors.

I’ve shared my thoughts about the Fiduciary Standard frequently on Twitter, LinkedIn, and in this prior post.

When all is said and done, however, I think the issue is a simple one. Whether an investor engages the services of a Registered Investment Advisor (RIA), a representative of a Broker-Dealer, an insurance agent, or anyone holding themselves out as a provider of financial advice, individual investors should have the expectation that this person is acting in their best interests. Simplistic, yes. Common sense, I sure hope so.

Many brokers and insurance companies have argued that instituting this type of standard would be too costly and they might be unable to serve many smaller investors. Please, give me a break. Are these companies admitting that some of their representatives are selling products that are not in their client’s best interests?

Will we get a uniform standard of care for all financial advisors serving individual investors? I’m skeptical, but hopeful we will at least see a vast improvement over the current suitability standard that most financial sales types are now held to.

What do you think? Please feel free to add any comments or thoughts about this issue.

What should you do if you are looking for a financial advisor?  My very biased suggestion is to check out the NAPFA Find an Advisor link http://findanadvisor.napfa.org/Home.aspx.  All of my fellow NAPFA members and I adhere to a Fiduciary Oath and we pledge to put our clients first.

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  1. Roger, my opinion is just a little bit different. I think the customer deserves a choice, but the problem we have today is that the customer does not know there is a choice because so many "advisors" are misleading the customer by their terminology, titles, and marketing. Sometimes it is inadvertent, but many brokerages deliberately position themselves as "trusted advisors" while under no legal obligation to put the customers interests first. Thus, the customer does not realize that the "financial advisor" is actually a sales person earning commissions on product recommendations. And how many times have you seen a broker state that he or she has $X dollars under management? That is very misleading when the broker has no discretion to manage a portfolio.

    You are correct that it is really all about customer expectations. The industry would be well served by making sure that consistent standards are connected with certain terminology ("advisor", "assets under management" etc) so that customers can know whether or not there is a financial interest in the product or security the financial professional is recommending.

    Another example of failing customer expectations is when affiliates gain access to customer information, even if is only their contact info, to solicit sales for the affiliate's products. As a customer, I have an expectation that my information, including the fact that I am a customer, should remain private and not be shared across a large firm with others in another division. Specific examples: If you belong to the AAA auto club, do you expect that a representative with AAA Insurance will be soliciting you? Or if you have a Chase credit card, do you expect that a registered rep with JP Morgan Securities LLC broker will call you? I don't, yet it is common for affiliated firms to share information notwithstanding the privacy rules and affiliate information opt-in requirements. I am not saying these two firms do so, I am just using them as examples familiar to consumers as broad financial services companies. The customer may not know the solicitor is "dual-hatted": banking and brokerage, brokerage and insurance, etc., and certainly doesn't know that differing regulatory bodies cover different products. Often I have seen references to a securities product bought at a "bank" when it was, in fact, purchased at a broker-dealer affiliated with the bank through the same holding company. Different rules, different regulator, different standards.
    Jan Sackley, CFE
    Fiduciary Foresight, LLC
    Risk and Regulatory Compliance Consultants

  2. Jan thanks for your comment. I agree totally with everything that you said. My point was simply that all providers of financial advice to consumers should be required to put the client's interests first and be held to that standard. As you know I am extemely biased towards the fee-only model as a member of NAPFA. I agree that terminology is confusing to many consumers, for example fee-based. To me this is just another version of commissioned product sales, but it is portrayed as something different and better to the public by many of the firms using this model.

  3. Roger, when you say fee-based, are you differentiating compensation based on assets under management from hourly or per-plan type fees?

  4. Thank you for the comment. In my opinion, fee-based is one of the most confusing and misleading terms in my profession. There are three main forms of compensation in the financial advisory business. Commissions are pretty straightforward, the advisor is paid some sort of front or back-end fee for the sale of a financial product. Typically this might be for loaded mutual funds, annuities, or insurance products.

    I work on a fee-only basis. This means that I receive a fee in exchange for the advice I render. This could be a one-time fee for a financial plan, or an ongoing fee for investment and financial planning advice. Typcially my ongoing fee is either a flat retainer or a percentage of assets under management. Some fee-only advisors charge an hourly fee. In all cases, fee-only advisors receive no compensation from the sale of financial products.

    Fee-based advisors typically would do the intial financial plan for a fee. If, however, a client decided to implement the plan's recommendations typically the fee-based advisor would sell the client investment and insurance products for which they are compensated via commissions. The confusion I think is obvious. Fee-based can be made to seem the same as fee-only, however in my opinion it is simply another version of the commission model. I have spoken to many former clients of fee-based advisors who had no idea they were paying commissions to the advisor.

    At the end of the day it's all about the full and uniform disclosure of all sources of advisor compensation to clients and prospects.

  5. larry elford says

    Thanks Roger for a very illuminating piece. You mention three main forms of compensation, and I wonder about the category of those who charge an hourly charge to counsel, guide or coach people. Is that a significant portion of the business and worth mention, and ..

    Is any possible simplification gained by separation of types of practitioners who gain compensation by “advice”, verses those who gain comp by sales? I agree with your comment about ‘confusing and misleading terms’. Thanks much

  6. larry elford says

    Forgive me if my question was answered further on in your article…I often make that mistake

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