Fiduciary Standard Can Serve Middle Class—Look at Accountants and Lawyers

Expert acknowledges ‘shrouded pricing’ boosts demand, but says it also dampens consumer trust

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Michael Finke, Texas Tech finance professorMichael Finke co-authored a study showing that a fiduciary standard was not a barrier to offering financial advice to clients of varying wealth levels, a view that the financial services industry has strongly denied. While Finke (left) found middle-class clients were served no less in fiduciary states like California than similarly situated consumers in non-fiduciary states, the Texas Tech professor told AdvisorOne that non-fiduciary financial services are to some extent associated with increased consumer demand.

He cited a study by two Wharton professors of a remarkable episode in India, where through some regulatory quirk, closed-end mutual fund companies were allowed to amortize their expenses, akin to 12B-1 fees in U.S. open-end funds, for about two years. “Producers responded to take advantage of this window,” Finke said.

The Texas Tech finance professor, also a CFP, summarizes the study’s finding as follows:

“In markets where some prices are shrouded, the less sophisticated consumers gravitate toward the products with higher prices while the more sophisticated see through opaque pricing and make better choices. This serves the industry [which] can segment the market by sophistication and sell different products to different consumer groups—for example commission funds to less sophisticated customers and lower-fee, direct channel to the more sophisticated—for example, Merrill Edge.”

So, while Finke acknowledges that commissions motivate the industry to serve middle-class clients, the questions he asks are whether different compensation schemes could provide that motivation and whether consumers should have precise information about what they’re paying for financial advice. And he answers affirmatively to both.

“There are plenty of professions that seem to have been able to withstand consumers’ ability to recognize how much they’re paying for that service,” Finke says.

As an example, he adds that he can’t drive two blocks in downtown Lubbock, Texas, without seeing various advertisements competing to offer accounting services. Like law or accounting, “there’s enough of a need that they will be able to sell” investment advice.

Moreover, the dominant industry method of providing such services has a demand-depressing effect that is often not considered.

“One of the most important marketing problems that the brokerage industry has is a general lack of consumer trust,” Finke says. “There’s no question that consumers want professional advice; they need help. Being able to assure a customer that the rep is looking out for their best interest just seems like common marketing sense. If you look at any survey of consumers that asks why they don’t seek services, the No. 1 answer is trust. This is an important barrier for the industry to surmount.”

Besides restoring trust, the industry must do more to professionalize the provision of financial planning advice, Finke says. “We [need to] train people either at universities or through some sort of continuing professional education format to be able to provide advice that is science-based and unambiguously in the interest of the client,” he says.

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