Fiduciary Follies

The battle over requiring all financial advisors to act as fiduciaries rages on with both the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) considering fiduciary rules. Probably the biggest reason that nothing has actually happened since the Dodd-Frank mandated considering of a universal fiduciary standard in 2010 is the aggressive resistance of the brokerage and insurance industries.

A recent op-ed piece in the Wall Street Journal by investment advisor/insurance salesman, Keith Klein of Phoenix waves the non-fiduciary advice industry’s favorite red herring, higher fees for clients:

“Adhering to stringent fiduciary standards comes at a cost to advisers. More compliance means a greater investment of time and that almost obliges the adviser to pass a fee for that time onto the client.

“The problem with making everyone in the industry a fiduciary regardless of their compensation model is that the price of doing business goes up. The danger is that a universal fiduciary standard could eventually price the smaller investors--those who can't afford to pay extra fees--out of the market.”

I’m confused by this argument. How does doing what is in the best interests of clients increase the cost of doing business? Mr. Klein implies that it’s really hard work to find the best products. He questions whether fiduciaries are “evaluating every life insurance company or all 11,000 mutual funds to find the right policy or product for their clients? Probably not.”

Thanks to the wonder of computers and the Internet, most fiduciaries are doing just that. They eliminate all of those products that are obviously not in their clients best interests (high-commission products, expensive insurance based “investments,” illiquid and/or opaque offerings, etc.) to come up with a “short list” of investments that have a good chance of working for their clients.

I have yet to hear a single good reason why acting as a fiduciary will raise the costs for brokers or other product peddlers. What is the regulatory requirement that will eat up all of this valuable time? There are no specific fiduciary reports to be filed. The only downside for financial salespeople is the possible reduction in income when they can no longer sell inappropriate indexed annuities, high-load/fee funds, and, of course, those high commission non-publicly traded REITs.

The most honest objection to a universal fiduciary standard would read something like:

“Acting in the best interest of a client will make it harder to make a quick buck by obfuscating and misleading clients in order to sell them high-commission, high-fee products for which there are better, cheaper alternatives.”

They can’t tell the truth because doing so would lead to immediate acceptance of strict fiduciary regulation on everyone providing any type of financial advice. Creating muddled and fallacious arguments provide their only hope.

Since Mr Klein decided to use the national media to claim potential harm from being forced to do what’s best for his clients, I decided to do some research on just what he and his firm does for (or to) them today.

His firm, Turning Pointe Wealth Management sells insurance “investments,” securities, and other commissioned investment products. In touting his various credentials, Klein states, on his website, “In addition to being a Registered Investment Advisor…” 

This statement implies that he does, in fact, have a fiduciary responsibility to his clients. Although Wealth Pointe is not registered as an investment advisor (individuals are never RIAs; only firms are – individuals are IARs – investment advisor representatives), his firm does offer “Investment advisory services… through CUE Financial Group, Inc. a SEC Registered Investment Advisor.”

That relationship should mean that he must act in a client’s best interests. However, CUE (whose annual fees start at 2% per year) attempts to mitigate that responsibility with the following statement from the Form ADV Part 2:

"Clients should be aware that the receipt of additional compensation gives CUE Financial Group Inc., its IA Reps or other supervised persons incentive to recommend investment products based on the compensation received, rather than on a client’s needs, and therefore creates a conflict of interest that may impair the objectivity of our firm and these individuals when making advisory recommendations."

Could those valuable and easily camouflaged commissions be the reason for firms like Wealth Pointe (and many others) not wanting an across-the-board fiduciary standard?

The argument that acting in the clients’ best interests essentially goes against the clients’ best interests, because it might cost more, seems disingenuous coming from a firm whose disclosure document clearly states they already charge more than most (if not all) fee-only fiduciary investment advisors.

Because I believe that clients deserve the best investments at the lowest equitable price for all parties, I would love to see a universal fiduciary standard enacted. I know that it will not raise the price of investing advice or preclude smaller investors from getting help. My firm, Vestory, is proof. We offer investments and advice, acting as fiduciaries, at a total cost that is less than the annual fees of most actively managed, no-load mutual funds. 

There is a small, selfish part of me that hopes these brokers and salespeople successfully block a fiduciary standard. Being part of a tiny, elite group of advisors (only about 15% of all financial advisors operate as fiduciaries) gives us a competitive advantage that is incredibly valuable. Plus, I have to admit that it is fun making fun of the other 85%.