I recently had an email exchange with a reader, who prefers to remain anonymous, who commented on my May 28 blog, The Process of Financial Planning: Time to Go to the Next Level? It was a wide-ranging discussion about the financial planning profession and the regulation of financial advice. Here are the highlights I hope you find it as interesting as I did.
Advisor X: “It is interesting that you say that the focus on financial planning is too narrow, while I feel that some in the industry have expanded the realm to areas best left to those in other fields. Perhaps the idea of [providing] advice lends one to think that they are indeed quasi-psychologists and can give advice on a plethora of issues that the client faces: career choices, divorce issues, and emotional and legal problems, in addition to financial advice.”
Me: I agree with you that in some ways "financial planning" has become too broad: moving into areas which were not the intention of the Investment Advisers Act, but, of course, neither was financial planning itself. Still, planning has its limits. At present, I'm concerned about the limitation of financial planning to a "process" which can be used by anyone in any channel of financial services without regard to conflicts with clients' interests or any comprehensive duty of client care.
Advisor X: “I can’t help but notice how you said that the organizations are being pressured to place the client fiduciary standards into their respective codes, as opposed to legislative bodies doing it. Can the industry really do it or do we need Capitol Hill?”
Me: Seems as if all concerned—advisors, brokerage firms, trade organizations, regulators and Congress are feeling the pressure of increased consumer awareness/demand for a much more broad fiduciary standard. In my view, the "best" solution would be legislative, such as simply removing the "broker exemption" from the '40 Act.
Advisor X: “Are the advocates of the uniform fiduciary standard sincere or merely playing politics? Do you think that in areas where the standard has been broadened, such as retirement plans, are people really better off or do they simply have a different remedy?”
Me: These days, there is little doubt that many folks engaged on every side of most debates are simply promoting their own agendas. Still, in today's America where virtually everything seems to be for sale, it seems to me the need is greater than ever for professionals who place the interests of their clients above all else.
Advisor X: “If [a uniform fiduciary standard] takes a decade to develop, then possibly in the interim, some of the more egregious behavior may be mitigated, only to be replaced with a new complaint: should you charge a management fee for an allocation fund that the advisor never changes? And a new wrinkle: brokerage and commission accounts are better for many people—on the investment side.”
Me: Again, a very interesting take. Frankly, I think we'd be better off if surgeons were paid the same if they performed an operation or recommended against it. Point is, sometimes the best advice is to do nothing—and there's often great value in that advice. Asset managers get paid to make good decisions: and sometimes doing nothing is the right thing to do: does that make the advice less valuable?
As for commissions, since agents and brokers don't legally work for the "clients," their compensation is irrelevant. A client's “cost” in buying insurance or securities includes the total cost of those products over the life of their ownership by the client. Just as the cost of your car isn't what the salesman got paid for selling it to you.
To my mind, this is the central issue in the current discussions surrounding retail financial advice. Salespeople are representatives or agents of their firms. While some enlightened salespeople may act in the best interests of their clients (and some enlightened firms may let them do it), they are under no legal obligation to do so, and often have large financial incentives not to.
I have no problem if financial consumers choose to work with salespeople (they provide a valuable service) as long as the clients fully understand the nature of their relationships, the total costs involved and the differences that fiduciary advisors offer.
In our current regulatory environment, however, none of those conditions is likely to be met.