We are not in favor of the Department of Labor’s Fiduciary Ruling primarily because any rule-based system of ethics that the nation’s major brokerages and insurance companies can abide by will be a weak mockery of what a true principle-based fiduciary standard ought to be.
Anyone who doubts that should read Liz Kinner’s article from InvestmentNews entitled, “Consumer group contends brokerages misrepresent their sales focus” which begins:
The nation’s major brokerages and insurance companies are either misrepresenting their services in their marketing to prospective clients or they’re falsely representing their businesses in their court challenge to the DOL fiduciary rule, a new Consumer Federation of America report said.
A review of 25 of these firms found their websites refer to their professionals as financial advisers and other titles that create the impression that advice is the “essential service” being offered, the 16-page report released Wednesday said. Additionally, their marketing messages aim to convince those saving for retirement that they should trust their professionals, who are looking out for the client’s best interest.
At the same time, the industry groups that represent these firms are asking federal courts to throw out a Department of Labor rule that requires anyone giving retirement advice to make recommendations in a clients’ best interest. They claim it should not apply to the firms they represent because their professionals are mostly selling investment products and “are not engaged in relationships of trust and confidence with their clients,” the CFA report said.
“Are they lying to the court, or are they lying to their customers?” asked Barbara Roper, the group’s director of investor protection.
It is clear that the nation’s major brokerages and insurance companies are lying to someone. No matter who it is, this should serve as a message to their clients.
They can’t try to pretend that they are primarily providing financial advice in their marketing and then claim that they are primarily salesmen and “are not engaged in relationships of trust and confidence with their clients” in order to fight the requirement that they act like fiduciaries.
The Consumer Federation of American reports that:
The title most commonly adopted by financial firms for their financial professionals appears to be “Financial Advisor.” Firms that use this title (or a variation of it) include: Janney Montgomery Scott, A. Davidson, Stifel, Wells Fargo Advisors, HDVest, Baird, Raymond James, Ameriprise, Edward Jones, BB&T Scott and Stringfellow, Chase, UBS, Morgan Stanley, SignatorOne (formerly John Hancock), Lincoln Financial, and VALIC.
And yet these are the same companies who are trying to dodge the fiduciary requirements.
I read the original report by the Consumer Federation of America entitled “Financial Advisor or Investment Salesperson? Brokers and Insurers Want to Have it Both Ways” which read:
Investors who unknowingly rely on biased salespeople as if they were trusted advisors can suffer real financial harm as a result. It is estimated, for example, that retirement savers lose $17 billion a year or more as the result of the excess costs associated just with conflicted retirement advice. The cost on an individual basis, in the form of lost retirement savings, can amount to tens or even hundreds of thousands of dollars over a lifetime of investing, money that retirees struggling to make ends meet can ill afford to do without. In addition to paying higher costs, investors who rely on biased sales recommendations as if it were unbiased advice can end up facing unnecessary risks or receiving substandard returns as a result of incentives that pervade the compensation system for sales-based advisors. Cumulatively, these industry practices drain tens of billions of dollars every year out of retirement savers’ pockets and into the pockets of financial institutions and their financial professionals.
The report contains a collection of marketing quotes and legal filings that are at odds with one another from each of the firms cited. The quotes show that “sales-based financial professionals use a variety of tactics to portray themselves as trusted advisors.” First and foremost, they use titles such as Financial Advisor “that convey the impression that they are providing expert investment advice.” Additionally, they portray themselves as trusted advisors through “promotion and descriptions of their work that convey the strong impression they are offering investment advice and retirement planning tailored to meet individual needs.”
Examples are given for each brokerage or insurance company. As an example, for Ameriprise, they cite that:
The website features a 44-page “Client Relationship Guide” whose stated purpose is to give clients a better understanding of the company and the services it offers. It states: “Our commitment to you: We provide personal, high-quality advice. Our approach is based on sound financial principles and a full view of your needs. We go beyond the numbers to understand your needs and provide you with clear actions you can take to help you achieve your dreams and feel more confident about the future. We tailor our advice to your personal objectives, time horizon, and risk tolerance, as well as other factors.”
And yet they have joined a lawsuit which is based on the central premise that they are not in the business of giving advice and so should not be burdened with the requirement to give good advice. They go to great lengths to avoid even using the word or the title “financial advisor”, instead making reference to “commercial sales relationships.”
The Consumer Federation of America report describes the difference this way:
The difference in the two standards – the best interest standard firms strongly suggest that they meet when marketing their services and the suitability standard they argue should apply – is significant. The suitability standard that governs securities and insurance recommendations allows “financial advisors” to recommend investments that are more profitable for them, rather than those that are the best option for their customers, as long as those recommendations are generally suitable for the investor. In short, they can legally recommend the worst of the many possible suitable investments, rather than the one that is best for the customer. Moreover, as noted above, firms often pay higher compensation or offer other incentives to encourage their sales reps to recommend investments that are most beneficial for the firm.
It should be clear that these firms are either lying in their marketing or lying in their lawsuit. Either way, consumers should avoid working with firms that lack integrity.
By contrast, fee-only fiduciaries such as those who are part of the National Association of Personal Financial Advisors (NAPFA) have promised to uphold these core values of NAPFA:
- Competency: requiring the highest standards of financial planning
- Client-Centered: committing to a fiduciary client-first relationship
- Comprehensive: practicing a holistic approach to financial planning
- Compensation: using a Fee-Only model that facilitates objective advice
- Complete Disclosure: of our fees and any potential conflicts of interest
You deserve a fiduciary standard of care. And with NAPFA firms you get an advisor who accepts the fiduciary responsibility to act in your best interests and refuses to accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product. You know your financial advisor can’t be a salesperson when they have nothing to sell.
There are a wide range of financial planning services which are part of comprehensive wealth management that do not involve selling product. Commission-based agents and brokers have a difficult time justifying these services when they don’t bring in any product revenue.
About 93% of the financial services world is comprised of commission-based agents and brokers. The Department of Labor cannot be trusted to reserve the fiduciary label for only those who deserve the title. Government power is too easily corrupted and regulatory agencies are captured by the very industries they are supposed to regulate. If the government tries to codify a fiduciary standard into law while 93% of the financial services industry is not compensated as fiduciaries should be compensated, many practices which violate the fiduciary standard will be allowed as exceptions to the rule.
Those who doubt this principle need look no further than the Labor Department’s latest proposal “that would seemingly ease the compliance process for some distributors selling fixed indexed annuities under the fiduciary rule” as reported recently in InvestmentNews by Greg Iacurci. He goes on to report:
The proposal, if accepted by the Office of Management and Budget, would likely grant a class exemption under the fiduciary rule’s best-interest contract exemption to independent marketing organizations (IMOs), which market insurance products to independent insurance agents.
Independent agents are by the far the largest distribution channel for indexed annuities — representing roughly 60% of sales — and the fiduciary rule, as currently written, is projected to be hugely disruptive to this channel
Indexed fixed annuities are, quite simply, terrible. They are a confusing product sold through misleading statements which consumers fail to understand. They are laden with fees and expenses. And they are rarely, if ever, a reasonable part of a financial plan which is in any client’s best interests.
To provide an exemption to the fiduciary rule shows that the Department of Labor cannot be trusted with the right to bestow the fiduciary label. Insurance companies protecting 60% of their sales will be able to buy the Department of Labor’s blessing and exemption. The fiduciary standard will be redefined such that it will be a meaningless term.
Commission-based firms want either to be exempt from the fiduciary standard or else given the title anyway. We should not allow that.
So long as a majority of the financial services industry is commission-based, it is best if fee-only fiduciaries can keep the distinction clear.
Photo used here under Flickr Creative Commons.