Over the past several years, the big focus in the financial advice industry has been around the various iterations of a fiduciary standard. From the DoL fiduciary rule, to the SEC’s Regulation Best Interest, to efforts by individual states to pass legislation, there has been plenty of debate over the best (and most practical) way to ensure that all financial advisors do what’s in the best interest of their clients. However, lost in all the sturm und drang over these regulatory and legislative undertakings is the question: Do we even really need a fiduciary rule in the first place?
After all, compliance with existing regulations is expensive and time consuming enough as it is, and a higher fiduciary standard may only amplify that. And even if you try to legislate morality within the professions, won’t there be those who figure out a way to break the rules, anyway? Not to mention that acting in a client’s best interest is arguably just “good business” anyway?
In our 20th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss why a fiduciary rule is necessary even though acting in your client’s best interests is already “good business” in the long run, how real financial advisors are at a competitive disadvantage against those who really are just out to make the next buck as quickly as possible, and how advisors have a duty to spread the word about what it means to be a fiduciary.
As a starting point, it’s important to recognize that serving clients well isn’t just about being able to look at yourself in the mirror… it is also, in a very real sense, in your own best interest as a business owner… at least if you want your clients (and the friends and family that they might refer to you) to keep paying for your services for several decades to come. In other words, an advisor can either build a sustainable business based on trust, or a business that’s dependent on finding the next person to fool in the short term with a quick sale before moving on to the next.
However, the reality is that all real financial advisors have had the experience of meeting with a prospective client who has been on the receiving end of an unscrupulous “advisor” who has already extracted as much as they legally could from that client and moved on. And the unfortunate fact is that it’s often more profitable (and maybe even easier) to scare someone into buying a high-commission “can’t-lose” product than it is to convince them to pay an ongoing fee for an admittedly intangible service.
And that’s really the crux of why a blanket fiduciary rule is necessary. Even in today’s environment where consumers are better educated and it’s much easier for someone to ‘do their due diligence’, the bar is still so low that, not only can anyone call themselves an “advisor”, but they can still extract nearly 10% of the wealth of every person they meet by selling a low-quality high-cost product, with little worry about any legal recourse… since the bar to prove their sale was “unsuitable” is so low and easily cleared.
Ultimately, the key point is to understand that, while real financial advisors remain at a competitive disadvantage to salespeople who can legally take a large chunk of someone’s net worth by selling them flawed and expensive products as quickly as possible and moving on to the next, there is at least an ongoing effort by regulatory bodies and state legislative bodies to make it more difficult for that sort of maleficence to occur in the first place. But it’s not just up to the regulators to change the industry (and the public’s perception of it). Responsibility for affecting change also falls on the shoulders of real financial advisors, who (as part of their sacred duty to help the clients manage, grow, and protect their life’s savings) have to help foster awareness both within and outside of the industry around what it means to truly be an advisor.
***Editor’s Note: Can’t get enough of Kitces & Carl? Neither can we, which is why we’ve released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
Kitces & Carl Podcast Transcript
Michael: Welcome Carl.
Carl: Greetings, Michael. We’re going to go, because this is always, you know, we talked about this serious subject last time around fees. So today might be serious. So we’re going to go greetings, Michael Ernest Kitces. Welcome to the conversation today.
Michael: Okay. I thought you were going to take me less serious. Anything that starts out with all three names is like, someone’s dead or I’m in serious trouble.
Carl: We’re bringing the heat today, because we’re going to talk again about fees, and specifically, we’re going to talk about this idea that should doing the right thing, you’re going to use better terms for it, but should doing the right thing be regulated or should we let the market take care of it?
Michael: You raised this good point, I think, when we were talking on the last episode about like the dynamics of conflicts of interest, or the challenges of the AUM model is that my client says, “Try pay off the mortgage,” if I say yes, like I watch assets go out and my fee goes down, and you made this comment of what, you know, in my enlightened long-term self-interest as the advisor, like serving the client whilst the client is happy is what does best for the client in the long run which therefore is good for our business. Like, I don’t sweat about it, and tell the client to pay off their mortgage if it’s the right thing for them because I know it’s good for me in the long run. And the comment to me echoes something that I hear from frankly a lot of advisors out there, that’s either something to the effect of like you can’t legislate morality, so why are we even trying? Or just a somewhat simpler, like what’s the point of requiring a fiduciary duty when acting in your client’s best interest is just good business anyway?
What’s The Point Of A Fiduciary Rule In the First Place? [05:52]
Carl: Yeah. So a quick couple thoughts. One is like that example, “I want to pay off my mortgage,” it’s clearly important the client. Yes, I can build a spreadsheet that shows them it’s not financially right but it’s clearly important to them. I’ve been to mortgage payoff parties, I’ve never been to an efficient market portfolio party. It’s clear. It’s really an important thing. That came up often with me and I was always like, let’s figure out the most efficient way to do it, let’s do it. And I would tell them, like I know you may think of this as like, “I know it represents you’re going to take $400,000 from this portfolio, I’m no longer going to bill on that. But I’m not worried about that because I want to keep you as a client for 20 or 30 years and I want your kids as clients.” So that’s really how I thought about. So not only was it the right thing to do, in air quotes, right, like the right thing to do, it was the smart thing to do. Right? Here’s the dilemma I see, is because my view is if I didn’t do that, I was going to be out of business. Or I was going to build a business dependent on finding the next fool. Right? If I could just find people that I can fool for long enough, and then when they leave, I’ll get another person I can fool for long enough. Like, those are my choices, you know. I’m going to be out of business or I’m going to find more fools, and I didn’t like that business model. I thought like, could I find 100 families that I was going to serve forever and serve their kids and serve their kids? The problem is…
Michael: So if you were better at prospecting, then you would have done the other one.
Carl: No, no, no, no. I’m saying that would have been the choice, right? Like, you got to choose. Do you want to rely on a business that relies on bringing in the constant stream of fools? And I’m using that term really carefully. Sorry. A constant stream of people that you are going to fool? Or do you want to rely on doing not only the right thing but the smart thing? And the market… So there’s this view that we can say, “The market will take care of dishonest advisors.” And we could say that. Like, they’ll be out of business. The problem is that on average, that may be true. But that doesn’t help that family.
Michael: One, frankly, like we’ve had an advisor marketplace of some sort or another for the better part of 80 years. We haven’t gotten rid of the bad ones yet.
Car: I know. And we also don’t have a place…
Michael: It’s all over the place. We all see it when the client comes in from the former advisor and their stuff’s a total mess at best or just they’ve clearly been sold a…
Carl: Garbage. Not a total mess, it’s garbage.
Michael: But, the market isn’t. I mean, I think it’s part of the challenge. The market isn’t figuring it out, or worse, and indirectly, this to me is part of why there’s a segment of commissions that rightly get so much flack is, well, I think any of us that have been in the business for some period of time have had that experience where you show up and not only is the portfolio full of garbage, so nothing you can do now, the advisor, advisor, air quotes, already extracted the toll. Those commissions were all ready paid up front, that’s why he or she has not called the client for three years, that’s why eventually, they came to you because that person’s already on to the next. Part of the challenge to this is not only are the bad apples out there, and frankly, it’s pretty damn profitable to be a bad apple. I would actually it might even be more profitable than your version. But…
Carl: If you can keep fooling people in the short run, for sure.
Michael: Just not if you’re good at prospecting.
Carl: Yup. Yeah. This stuff, I get so mad. Like, there’s a few things. I’ve said this to you before. There are a few things that I want to punch somebody in the face for, and this is like, this conversation gets me as close to it, because, yeah, it’s just garbage and it’s fake and it’s dishonest and it’s wrong and there’s nothing we feel like we can do about it. Because yeah, I did a lot, I did so much in annuity rescue work, right? That’s like all I ever did around, and I’m picking on annuities, but like back 10 years ago, you know exactly what I’m talking about, 20 years ago. It’s like all I ever did was like, “No, sorry. You’ve got to hold this thing for the next seven years and I’m going to help you hold it because that joker took all the money and you have to finish paying him off.”
Michael: But, I mean, like the reason he has a 7-year surrender charge is because the company is getting back at 1% a year, the 7% that someone got upfront. Like, that’s why surrender charge is excessive.
Carl: Yeah. I’m going to help you manage it and I’m not going to bill you for it because you’re paying… You know, like that’s terrible. It’s below a non-profit work, right? So it makes me so mad. So then, what’s the alternative? The alternative would be where we are. Like, I tend to say okay, the alternative is one by one by one. Like, that’s what I’m trying to do. I’m trying to say, “Grab the flag my friend.” Like, one by one. It’s remarkable. Let’s do remarkable work. The story will spread. It will build from the ground up. Get pitchforks. Like, that kind of thing, and hope that we can change it through the market, like through educating in the market. I know it’s naive, I know it’s ridiculous, but it’s like where I choose to focus because I have responsibility and the ability to take action at that level. But the other side is, regulate it.
Two Issues Clients Face After Having Been Sold Bad Products [08:12]
Michael: There’s two issues that I think come up for most of us who have come across these clients where just hey got sold garbage. It doesn’t have to be annuities, I think we’re only throwing it out there because they are certainly a subset of some pretty egregiously low quality high commission annuities that are out there, we talked about one on the last episode. Twenty percent commission with a 20% surrender charge, a real product actually existed. There’s two challenges to me when the client comes in with a bunch of garbage. They clearly got taken. Number one is, the money is all ready gone, and number two is, you have no recourse.
Carl: It was legal.
Michael: One of the pieces of paper you signed had disclosures that you may or may not fully have appreciated or understood, but that salesperson’s attorney at the arbitration panel will pull out the piece of paper you signed and that is the end of it because you cannot prove it was an unsuitable super-duper low bar. And you cannot prove it was an unsuitable sale. Never mind if it was a good recommendation or good advice. You can’t prove it was an unsuitable sale. You’re stuck with it with no recourse. And that to me is ultimate. When you get into these questions about like why do we have to have all these fiduciary rules if it’s pretty good business in the long run to act in client’s best interests anyways? Like, if that’s what you believe, this rule’s not for you. It’s okay. If that’s what you believe, this rule’s not for you. The reason that rules like this become necessary is because if you want, if your single-minded goal in life is to take 10% of the wealth of every human being you meet, you can commit burglary or you can sell high commission products. The first one will take you to jail and the second one’s completely legal as long as they sign all the paperwork. And that to me is the essence of why this stuff matters because if someone wants to be bad, the bar is so low it’s horrific what they can get away with. And I mean, there’s some line where eventually, like grandma got a contract with a 20-year surrender charge, she’s all ready 88-years-old, so this one probably really wasn’t good. But, right, we’ve all seen these where you look at the pile of stuff that was sold and you know deep down this was total BS and nobody’s going to get in trouble for it.
Carl: Great. So I really want figure out like what are you… Because I would love, you know, I throw this term around, real, you know. And the only reason that I throw this term around is there isn’t another term. Ron Lieber, my editor at the “New York Times,” and I have tried multiple times to write a column with a checklist. And out of the bottom of that checklist would fall like you should hire an advisor that meets all these checks. But every time we do it, somebody who meets all those checks, in the next couple of weeks, there’s some story in some paper somewhere about that person stealing money from little old ladies. I would love a label, right? Like, I would love a, like you can look in the phonebook, ah, sorry. You can google this thing, right? You can google this thing, real financial whatever. Like, whenever we call them, there’s no word that’s not all ready polluted. But financial planner, real financial advisor.
Michael: This is ultimately why professions end up with regulation and barriers to entry. There’s an high version of that where you drive up the cost of services by making it too hard to get a license, but this is why all professions have barriers to entry. You cannot walk up and down the street calling yourself a surgeon if you don’t have the medical degree. The difference between taking a knife and cutting into someone and saying, “Bad luck, that turned out poorly,” or going to jail is one of them has a license and is hired for the service. The other one, even if you hire them, they don’t have a license, it’s illegal. At some point, we make this distinction that you cannot be licensed unless you have the training, education, experience, and no one can use the word unless they have the license where they’ve checked those training, education, experience boxes because particularly, when you get to professional services, you can’t come up with the checklist for the advisor, and I dare say it would be pretty hard to come up with the checklist for an accountant, an attorney or a doctor as well. Right? We have all the same problems. Like, how do you know this doctor who does your surgery is going to save your life? How do you know?
Carl: So yeah. You want to do this job that comes with these sorts of things. Like, a client shows up and they know they can, you know, trust, you, like you’re going to do the right thing, you’re operating under a fiduciary rule, all of those things. And if you want to do that job, you can call yourself this thing. Like, you can get this license, you can call yourself this, well, a lot of air quotes if you were just listening. And if you want to do a different job, like you want to sell a product, then you go do that thing. I would love it to get clear like that. And I’m glad that you are lending your voice to that and trying to help clarify it by just speaking out about it. I love that there are regulatory bodies doing it, I love that there are big organizations that are trying to speak on our behalf, I love that we’re working on it. And I want it. But in the meantime, I want the next financial advisor I talk to to do the right thing, and I want the next one after that to do the right thing, and I want word of that to spread because as Seth Godin says, like it’s remarkable. Being honest in our industry is remarkable. And he doesn’t say that. He says remarkable, in other words, worth remarking about. So I think we’ve got this thing going on and I don’t, I used to get all riled up about this on a big level and now I think, “Okay, how do I help the next advisor do the right thing? How do I help the next advisor know there are other people like them doing the right thing?” Because it feels really lonely. Right? It’s brutal.
Why More Stringent Regulation Is Necessary [15:22]
Michael: I’ll admit. Different people respond to similar situations differently. I’ll admit for me, I pretty much go on the opposite direction, that, you know, part of why I feel myself drawn more and more to a lot of these regulatory discussions and, you know, we’ve been more involved with comment letters and a lot of these fiduciary rulemaking issues, and both supporting parts of them and objecting the parts of them is, you know, I wish we could just get to a point where we could lift up the good advisors and they would outcompete the bad advisors, the bad advisors would go away. But the problem is it’s too damn profitable to be bad in our industry. Like, you could legitimately, truly, you can legitimately take 10% of the wealth of every human being you meet if you can get them to sign one piece of paper. That’s all it takes in our industry. Well, maybe there’s two or three pieces of paper, but everybody gets flustered after the first one. You can legitimately take 10% of the net worth of anybody you meet by getting them to sign a few pieces of paper. It’s too profitable to be bad and that’s ultimately why I pound the table so hard around the importance of some of these fiduciary rules because not only is it so profitable to be bad, but when you find them, you still can’t get rid of them because it was legal, because the bar is so low. So we can’t outcompete them because frankly, they get more money than us and then, they get to use the money to market more than us. And even if you find them and catch them, you can’t always get rid of them because the bar to legality is so low.
Carl: Wait. Wait. I just want to make sure that I, for the record, my opinion is clear here. I think you can. I realize like in macro, we can’t outcompete them. Fine. And I was just going to say something goofy, like human enlightened sort of goofy thing. But look, at the end of the day, those people are still jerks. Unhappy, miserable jerks with a nice car and a nice house. Fine. And I realize there’s some plenty of happy people. I’m just saying…
Michael: Some of them are pretty happy with money too.
Carl: That’s fine. That’s fine. All I’m saying is I don’t feel like I’m at a competitive disadvantage if I’m a financial advisor doing everything right. But I realize that was, in fact, that’s…
Michael: That actually raises a good point. I actually do feel like I’m at a competitive disadvantage.
Carl: I understand why…
Michael: Because part of the phenomenon, like when a random salesperson hits my client with a totally BS sales pitch for some product that’s grossly overpromised, they spend 15 minutes throwing the pitch out there, I have to spend 2 to 4 hours talking the client back to explain the why it was fake and isn’t real and drilling down the details to help them see that it was BS. And just that asymmetry, they can pitch crap in 15 minutes but it takes me hours to walk it back. If they have that conversation with enough people, not everybody is going to have someone that could walk that conversation back. That’s part of why the bad sales persist and keep happening and it’s so profitable to do it when you can grab 10% of someone’s net worth in a single meeting.
Carl: I only lost clients because I was unable to talk them out of doing something stupid that somebody else was proposing. Those were the only clients I ever lost, and I spent a bunch of time. I spent, like 50% of my time seemed to be like Nick Murray style, don’t do that. Don’t do that but I realized I can’t just say that, I have to talk you into it. And my hope was that they would eventually get detoxed and realize, “If anybody pitches anything to me, it’s garbage.” But yeah. You’re right. That’s a big burden.
Michael: Not everything is garbage. At some point, someone is going to pitch a thing that actually is unique and different and better. That’s part of the challenge.
Carl: But I agree with all that. I agree with all of it, it’s a burden. I agree with all of it, and I’m really glad, I want to be really clear, I’m super glad there are people like you and all the other people in the industry doing that thing. And I want them to keep doing, like I’m supporting, like, “Yay, that’s awesome.” And then, I, at the very same breath, will say again, but I’m going to keep saying, “Hey, let’s fight the good fight on the local level. Let’s one by one hold each other’s hands and walk forward, let’s make a difference on a local level. Can you, with your next client, can you do the right…” “Yeah. I realized they called again and said that Joe told them that they have to do this newfangled product.” I just tend to talk my family out of this more than anybody, like, parents and in-laws. “Hey Mike. So, the advisor’s told me this.” And you’re like, “Oh. Really? A private placement real estate idea. That’s new.” So, I’m with you, but I just want to keep holding and providing support for all of us, while we’re fighting the big fight, let’s also provide support for the day to day fight.
Michael: And I think from my end, there’s one thing that people take away from this when we get in this discussion of like, you know, you can’t legislate morality, like what’s the point of requiring fiduciary duty when you’re doing the right thing for the client is good business anyways. The answer is because it’s not always good business, because there’s actually a lot of money to be made by doing the wrong thing, and if you don’t lift the standards, you can’t even remove the people doing the wrong thing when you catch them doing the wrong thing. Because, the bar is so low it’s defensible in federal arbitration. That to me is ultimately the point. It’s not that we can hopefully protect every single client forever from having high standards. People will still find their way in from time to time. But for Christ’s sake, at least when you find them, have a way to remove them which we can’t do until the standards come up. There’s no recourse.
Carl: I can see the arc of this conversation. I think it’s really worked for us to maybe say the answer is both. The answer is absolutely, we’ve got to figure out a way to regulate this and we’ve got to fight the good fight on the individual level and just hope that we can get more people doing the right thing and it becomes a tidal wave,and I know that’s a naive, ridiculous statement and I’m okay with… It’s an unreasonable statement and I’m okay being unreasonable every once in a while. And I’m going to keep… And so both, right? I was never, I don’t think I ever have been on record saying we shouldn’t regulate. I just have been totally focused on this individual level thing, right?
Michael: Well, amen. Well, thank you Carl.
Carl: Thank you Michael. Well, talk to you soon.
Michael: Talk to you soon.