Wednesday, January 4. 2012
The Public Deserves A Choice, But It's Not Fiduciary Vs Suitability
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The Many Facets of The Fiduciary Standard and Practical Regulation
In recent years, the financial planning profession has been focused on the development of a fiduciary standard for financial advice, to protect the public from the harm done by those who claim to act in their clients’ best interests but actually make reco
In recent years, the financial planning profession has been focused on the development of a fiduciary standard for financial advice, to protect the public from the harm done by those who claim to act in their clients’ best interests but actually make reco
Weblog: kitces.com | Nerd's Eye View
Tracked: Feb 01, 09:19
Tracked: Feb 01, 09:19
Butchers, Dieticians, Brokers, and Advisors
In the ongoing debate about the fiduciary standard, it continues to be difficult explaining to the public just what fiduciary is and means, and how there's a difference between brokers who sell products and fiduciaries who give advice. A recent video by H
In the ongoing debate about the fiduciary standard, it continues to be difficult explaining to the public just what fiduciary is and means, and how there's a difference between brokers who sell products and fiduciaries who give advice. A recent video by H
Weblog: kitces.com | Nerd's Eye View
Tracked: Mar 28, 09:14
Tracked: Mar 28, 09:14
Coming Soon: A Fiduciary Standard That Allows Fees AND Commissions?
For many years, the battle lines for the fiduciary standard have been drawn. On the one side are those who support the standard, suggesting that commissions and conflicted business models must be eliminated to protect the consumer. On the other hand are t
For many years, the battle lines for the fiduciary standard have been drawn. On the one side are those who support the standard, suggesting that commissions and conflicted business models must be eliminated to protect the consumer. On the other hand are t
Weblog: kitces.com | Nerd's Eye View
Tracked: Apr 02, 09:05
Tracked: Apr 02, 09:05
Is The Fiduciary Standard Alone Enough To Protect The Public?
One of the major reasons that advocates recommend the fiduciary standard is the belief that if only everyone were subject to the standard, fewer client abuses would occur, because advisors would fear the repercussions (i.e., legal liability) of inappropri
One of the major reasons that advocates recommend the fiduciary standard is the belief that if only everyone were subject to the standard, fewer client abuses would occur, because advisors would fear the repercussions (i.e., legal liability) of inappropri
Weblog: kitces.com | Nerd's Eye View
Tracked: May 16, 08:54
Tracked: May 16, 08:54
Fees And Fiduciary: Good Business, Bad Marketing
As the financial planning profession continues its inexorable march towards a fiduciary client-centric standard of care that minimizes or outright avoids conflicts of interest, those most passionate about carrying the torch have often been the most vocal
As the financial planning profession continues its inexorable march towards a fiduciary client-centric standard of care that minimizes or outright avoids conflicts of interest, those most passionate about carrying the torch have often been the most vocal
Weblog: kitces.com | Nerd's Eye View
Tracked: Jun 14, 07:34
Tracked: Jun 14, 07:34
The CFP Certification As A Universal Minimum Standard For Advisor Competence?
Choosing a financial advisor is difficult, and as a result it's helpful to provide the public with guidance about how to select one. Unfortunately, though, in recent years recommendations to the public from many organizations have increasingly focused on
Choosing a financial advisor is difficult, and as a result it's helpful to provide the public with guidance about how to select one. Unfortunately, though, in recent years recommendations to the public from many organizations have increasingly focused on
Weblog: kitces.com | Nerd's Eye View
Tracked: Jul 23, 09:22
Tracked: Jul 23, 09:22
This is a point I have been screaming about for a long time! A bit of clarity in roles will go a long way toward settling this argument.
In fact, your post mirrors many of my own thoughts (although much more eloquently put by you) in a blog post I wrote almost two years ago as this battle really hit Washington: http://goo.gl/5E2Oc .
If we could agree -- or more accurately, be regulated -- to be clear and honest about what our professional roles are, a lot of this debate would simply vanish. Then it would be up to us to repair a tarnished image of what a financial planner is.
Thanks for putting the thought out there!
-Nathan-
I agree that the fiduciary vs. suitability debate is pointless. But I also don't think your solution gets us there either. Some amount of advice is inherent in most sales processes, you can't eliminate it. And that gray area then gets us back to where we are today.
The only solution I see is dividing financial products into two camps much like we have with drugs. In one camp we have straight forward vanilla products that are easy to understand (e.g., term life insurance, immediate annuity, etc) which are allowed to be sold directly to the public by financial companies and their salesforce and other distributors.
In the second camp we have those products which have sufficient complexity that a professional advisor subject to the fiduciary standard needs to be involved (e.g., write a financial prescription). Of course, this means we would also have to be more diligent about regulating the approved interactions between advisors and financial products companies (hopefully learning from some of the mistakes make in regulating doctor/drug company relationships).
I am taken aback by lobbyists who have (perhaps successfully) framed the SEC rule making process in terms of preserving choice. The choice already exists. Product sellers can sell away. The problem is holding out as one providing advice while merely engaged in product sales. This results in a "rush to the bottom" as to standards of conduct, if two actors can both provide advice but under varied standards. George Akerloff won a Nobel Prize in economics for his work, which leads to this conclusion.
In reality, fiduciary duties have always acted as restraints on conduct, both in terms of what is required of the advisor and what is prohibited. I fear that the SEC's rule making under Dodd Frank will eschew true fiduciary standards of conduct in favor of a "new federal fiduciary duty" in which duties of care are circumscribed, and in which conflicts of interest need only be casually disclosed (not avoided or, if unavoided, properly managed in a fashion that ensures no harm to the client). Of course, as we all know, consumers don't read disclosures, and don't understand them. (If disclosures did work, there would be no need for the true fiduciary standard.)
While the fiduciary standard requires more, and is a higher standard, we must all acknowledge that current oversight of RIAs, at least SEC-registered ones, is resource constrained. Having a higher standard does not necessarily equate to better consumer protection if it is not adequately enforced. Yet, failures in enforcement in no way diminishes the utility, superiority or necessity of the true fiduciary standard for providers of financial advice. Despite this, proponents of suitability often use SEC resource constraints to argue against the fiduciary standard.
Conflicts of interest in financial services are insidious. They have led to a diversion of a substantial portion of the returns of the capital markets away from individual investors. They have led to a financial services industry which, despite efficiencies resulting from the computer age, has grown to become a large segment of the nation's economy. Efforts to eliminate conflicts of interest, such as through arming investors with fiduciary representatives, have long been opposed by the dinosaurs of Wall Street. And this disintermediation process has been slowed by inappropriate SEC rule making since 1977.
Imagine a world where all nearly consumers of investment products were represented by fiduciaries. Would high-turnover, high-fee pooled investment products exist? Would VAs exist? This is the nightmare scenario opponents of the fiduciary standard have sought to avoid through hundreds of millions of dollars devoted to lobbying.
If nearly everyone became true fiduciary advisors, my clear advantage - in educating prospective clients of the many advantages my RIA business model offers, would largely disappear. Yet this outcome is one which many advocates of the fiduciary standard have Long sought - while fully aware that there own future business could be circumscribed. Why? Because much more is at stake. If Americans don't begin making far better choices about savings and investing, this will put an even great strain on federal, state and local governments in the future.
Imagine a world where the average retiree has a 50% greater nest egg in the future, as a result of disintermediation (avoiding high fee / high cost investments). Some reintermediation occurs, but increased competition will keep the fees of fiduciaries at the levels charged by other skilled professionals.
As seen, there are many aspects of the fiduciary standard "debate." There is a need, in my view, to preserve the business model of product sales. The difficulty arises, as one commenter has previously noted, in where to draw the line as to what transcends a product recommendation and when "advice" is provided. In a situation where consumers assume all financial consultants are trusted advisors, it may take some very forceful constraints on the use of titles, and marketing representations, and mandated disclosures, to re-establish the line.
2012 will go a long way in determining the future of the fiduciary standard, both as to when it will be applied to providers of advice, and how.
2012 will go a long way in determining whether the provision of investment advice and financial advice ever arises to the level of a true profession.
I doubt the fix will be prohibiting product sellers from providing a large quantity of advice, or in prohibiting the use of terms or titles which denote an advisory relationship when none really exists. Seeing the large lobbying campaign by warehouses and insurance companies, I am pessimistic about the outcome of SEC rule making. There's an old saying in Washington ... "Follow the money." I only hope I am wrong with this prediction.
Thanks for sharing. I find your parenthetical comment particularly striking:
"If disclosures did work, there would be no need for the true fiduciary standard."
So true, and what an intriguing way to frame the issue!
- Michael
The only difference is that the regulator is creating the debate among financial services professionals here! There is a new concept paper put out by the regulator which is soon expected to become a law for Registered Investment Advisers. It clearly points out that financial services professionals can choose to be either an 'Agent' or an 'Advisor'. The regulator believes that this will bring clarity in the minds of the investor. Of course, by opting for Advisor one has to follow a stricter standards and compliance compared to an 'Agent'.
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1317044891201.pdf
If this paper gets implemented [either with some modification or none], it will be a welcome step..since this will be first time ever that financial services professionals will be brought under 'Regulation' in India!!!
Fortunately, the bifurcation of sales product sales and advice has already occurred in both the U.K. and Australia. I recently had an opportunity to have a discussion with an advisor in Australia and it was refreshing to see how they serve their clients.
Unfortunately, the U.S. is quite a ways behind in catching up; am sure it has nothing to do with the lobbying dollars spent by the brokerage and insurance industries! Seems inevitable, though, that this type of structure is where we end up.
-Eric
When I go into a clothing store, I fully expect the sales person to peddle whatever line of patter (lies or not) it takes about a pair of pants or a shirt in order to sell it to me. It seems inherent to the sales process. If someone were already convinced of the need for a product or service, the human salespeople could simply be replaced by computers (witness Amazon). I would expect a sales person in the financial industry (just as in the clothing industry) to take the same approach.
Indeed. The difference, though, is that the person in the clothing store is not widely marketed and held out to the public as a "personal clothing advisor".
Given many solutions, the simplest solution tends to be the correct solution; one interpretation of Occam’s razor.
Bob Stanley
Bang on target, sir!
But I still have qualms about the issue of "advice solely incidental to" product sales. Could ANY product sale be truly "suitable" if the seller provided no advice (or elicited goals and "facts and circumstances" information without which no meaningful advice would be possible"?
I'm coming to the belief that a Product Salesperson who is not acting as an "advisor" - and does not wish to be regulated as such - ought to provide a disclosure that any advice he/she renders is intended to determine the suitability of product recommendations AND THAT SUITABLE SALE OF PRODUCT(S) IS THAT INDIVIDUAL'S GOAL when dealing with that consumer.
Whatcha think?
John
In my opinion the bad reps are ruining it for the professional, ethical reps. I could go through a litany of cases to prove my point, but the real point is that the financial services industry has proven that the advisor/salesman dichotomy you propose will not work if the goal is to protect the public, which all securities laws state as their goal. Asking the salemen and their BD's to work under an "honor" code simply does not work. For evidence, just check the FINRA site re cases each year, with suitability being one of the leading claims. Again, unfortunate that the honest professionals must suffer, but blame it on the real problem, lax compliance and BDs ignoring the laws to increase their bottom line.
You're partially making my point here.
First of all, if your example from the annuity salesman is deemed unsuitable, then it's unsuitable. Period. That means it's a violation even WITHOUT a fiduciary standard.
But the real point is that if the person had bought all those annuities from a website, would you have deemed the website's sale to be unsuitable as well? Would we prosecute the server for executing the transaction? Probably not. People have a right to make their own transactional decisions (although I'm certainly a supporter of educating them away from harmful ones). But why is it different whether the person buys the annuities from a website order-taker or a human being order-taker?
The real issue is how the annuity salesman was held out to the client. If that person held themselves out AS an advisor, I have a real concern, because that implies the client was ADVISED to buy the annuities. That's the distinction I'm making here. If the "annuity salesman" was simply a human version of a computer order-taker - then the scenario looks different.
The reason why FINRA is littered with complaints is precisely because people don't KNOW they're working with a salesman. They THINK they're working with an advisor. That doesn't mean every salesman has to BE a fiduciary. Are you going to sue a website for breach of fiduciary duty? Or a car dealership? Or the person on the sales floor at a department store? The public does understand salespeople and the caveats that go with them. What they don't understand are salespeople who hold themselves out as something they're not.
- Michael
I see nothing in that definition of "advice" that requires the recommendation to be in the best interest of the recipient. I think this is an overly narrow and simplistic way to look at it... and one that does not reflect the reality of how business is done. I certainly don't perceive every bit of advice I seek (whether professional, financial or personal) to be significantly detached from the biases of the adviser.
If anything, the reality that most people believe the financial advice they receive is given under a fiduciary standard is the best reason to require all to adhere to the fiduciary standard, or at the very least to make it painfully clear that the fiduciary standard - the one expected by the random person walking in the door - isn't the standard followed there. If such a public notice is considered a stigma, there's an obvious reason for that: to not follow a fiduciary standard is to specifically say to your customers that your best interests come ahead of theirs, and no customer wants to hear that.