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Consulting firm Dalbar’s chief executive, Louis Harvey, known as an advocate of fiduciary advice, has poured a bit of cold water on the idea of a universal broker fiduciary standard.
Fiduciary advocates and the broker-dealer industry have long disputed the relative merits of imposing a fiduciary standard across the industry. The industry has warned a universal fiduciary standard would freeze out middle-class clients, and a new study has disputed this finding, saying the data does not show variable treatment of income groups across a range of fiduciary standards in the 50 states.
But in an interview with AdvisorOne, Harvey (left)—who did not specifically comment on the methods or findings of the Finke-Langdon study—said the difference in levels of wealth necessary to obtain fiduciary advice was undeniable. “You can make three phone calls to three firms and ask their minimums,” Harvey said. “Every brokerage firm has a minimum for their RIA business which is substantially higher for the minimum of their commission business. The median for the RIA business is about $100,000; on the other, you can get a commission-based rep for about $5,000 [in assets].”
Another pitfall of a universal fiduciary standard that Harvey sees would be a tendency to limit an advisor’s willingness to introduce any but the lowest risk investments.
“If you are going to provide your client with a non-traded REIT, you have to do that on the commission side. If you do that on the fiduciary side, you’d be exposing [the firm] to litigation in the event that [the investment] falls apart,” he says.
The unknown risk in any new investment ideas would therefore pressure firms to be cautious, no matter how appropriate the investment might be.
Harvey says Dalbar’s research shows that fiduciaries, despite a tendency toward lower-risk investments, produce the same investment results as non-fiduciaries. But that does not mean fiduciary advice is not superior.
“At the end of the day, we’ve not been able to measure any meaningful difference [in investment returns] between the two across the board. But if you measure the clients, the difference is enormous,” Harvey says.
“Virtually all the fiduciary clients are happy and willing to recommend the advisor,” in contrast to far less satisfaction on the non-fiduciary side.
Harvey considers himself a “separatist” on the fiduciary question, seeing a role for both fiduciary and commission-based advisors each in their own areas. He sees a danger in “trying to take the guys selling Fords and Chevys and bringing them into the fiduciary world. Only those who are qualified should be there,” he says.
Changing the Chevy dealer’s label, he adds, “will not make them behave the way today's fiduciaries do; they will continue to sell Chevys.”