Deena Katz’s article “A Failure To Communicate” in the latest issue of Financial Advisor Magazine cites a study in which “only 52% of the respondents trusted the financial services industry to ‘do what’s right.'”
What is surprising about this statistic is that by my estimation, much less than 52% of those in the financial services industry have any legal obligation to “do what’s right.” Most of those in financial services are commission-based agents and brokers who are only held to a suitability standard. And many of those who are supposed to be held to a fiduciary standard are dually registered with a broker-dealer and have massive conflicts of interest to disclose. I don’t know what the percentages are (please send me any citation you can find) but I’ve heard that only about 7% are fee-only fiduciaries unencumbered by the conflict of interest of receiving commissions.
I suspect that a great number of consumers are trusting the financial services industry to “do what is right” even though they have no legal grounds for that trust.
Katz goes on to write:
Investors in the study were also asked to indicate which attribute is most important when making a decision to hire an investment manager. Thirty-five percent said it is when they trust the advisor to act in their best interest. Seventeen percent said it was when the advisor could achieve high returns. Another 17% said it was that the advisor was committed to ethical conduct, while 15% said they picked an advisor who came recommended by somebody they trusted. Eight percent said the advisor complies with the industry’s best practices, while 7% said the advisor’s fee structure was the most important thing.
The study also says investment managers should be able to take “responsible actions to address an issue or a crisis.” Sounds a lot like the financial planning process to me.
Let’s first tackle the important attribute—that an advisor is “trusted to act in my best interest.” Unless you have been hiding underground for the past several years, you are aware that there’s a debate over whether advisors ought to act in a fiduciary manner or whether they should simply make suitable product recommendations. It’s important to note that suitability rules do not require that someone is trusted to act in a client’s best interest. Yet I really can understand the issue some people have with the term “fiduciary,” a legal term that has broker-dealer attorneys apoplectic. We provide the following Committee for the Fiduciary Standard statement to clients, and it does not use the term “fiduciary” at all.
• I believe in placing clients’ interests first. Therefore, I commit to the following five principles and say to clients:
• I will always put your best interests first.
• I will act with prudence. That is, with the skill, care, diligence and good judgment of a professional.
• I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
• I will avoid conflicts of interest.
• I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.
No matter what opinions you have or constraints you may face in acting in the clients’ best interest, it appears that the public demand for a certain type of advisor may eventually end this debate for us.
Katz seems to think that the demand for fiduciary advisors will result in a greater supply of fiduciary advisors because commission-based agents and brokers will change how they run their businesses. Unfortunately there is a much easier way for them to compete.
The greater demand for fiduciary advisors has already resulted in commission-based agents and brokers being apoplectic, as Katz puts it, at the suggestion that they aren’t acting in a clients best interests. They are overcome with anger and extremely indignant about the idea that they are somehow immoral for getting paid for their work. They affirm all of the emotion behind the fiduciary standard and purposefully confuse the differences between fee-only and fee-based.
Just to be clear, there are there different groups: (1) Commission-based agents and brokers who have no obligation to act in the client’s best interests and are only subject to a fiduciary standard, (2) Commission-based agents and brokers who are also registered as investment advisors and therefore are subject to a fiduciary standard (often called “fee-based“), and (3) fee-only financial advisors who are subject to a fiduciary standard.
No wonder the average consumer is confused.
Next, let’s look at the response from investors in the study that says advisors should take “responsible actions” to address an issue or a crisis. This suggests to me that they really want financial planning, not just investment management. They want their advice delivered in the context of their lives; they want goals-based planning.
So I wonder if the 35% whose most important attribute when making a decision to hire an investment manager is “when they trust the advisor to act in their best interest” should change to “when my advisor has a legal obligation to act in my best interests and is free of the commission-based financial conflicts of interest.”
We recommend going to NAPFA.org to find a fee-only fiduciary who does comprehensive financial planning in your area. NAPFA (The National Association of Personal Financial Advisors) is “the country’s leading professional association of Fee-Only financial advisors—highly trained professionals who are committed to working in the best interests of those they serve.”
Do you want to trust your advisor is acting in your best interests or do you want them to have the legal obligation and be free of commission-based conflicts of interest?