In response to my July 30 blog The Case for a New Advisor Designation: ‘Fiduciary-Only' Advisors), advisor Russell Rivera wrote the following email:
“As an advisor fairly new to the business, I find it interesting to read about how some people think about the business itself. However, your most recent article made me want to join the conversation. As a person who offers financial advisory services, I like the ‘fiduciary-only’ label. It shows that I’m on the same side as my clients. I always share that with my clients and prospects. However, I am not ‘fee-only’ as the CFP Board puts it. When it comes to investments, I am. I believe that this is the intention of the ‘fee-based’ moniker.
“However, I do sell commission products. I am sure that we recognize that a proper insurance portfolio to manage risk is appropriate, whether the appropriate products are just term life insurance or include something more complex. But these are commission products. By law, if I sell these products, I may not rebate commissions in any way. And anyone who sells these products will receive a commission. Why shouldn’t it be me?
“So the question is, what would a ‘fiduciary-only’ label mean? Can a person act ethically like a fiduciary while not being legally required to do so? If I refer out all my insurance business to maintain a ‘fee-only’ label, will that necessarily result in doing the best thing for the client? It seems that while there is a legal definition of fiduciary, it means nothing without the ethical actions as well. The labels can be distinct.”
Here’s my response: Russell, you raise some very good, interesting, issues. I'll give you my views on them, but please remember, these are just my opinions, and others in the industry would undoubtedly take issue with them.
First, I know many good, ethical, client-centered financial advisors who are compensated by both fees and commissions. With that said, I have two basic problems with this approach as a model for a profession of financial advisors.
My first problem is that by having a license to sell securities, or insurance, an advisor is legally a representative or an agent of his/her affiliated companies. That means they have a legal duty to represent the interests of those companies.
Certainly, some enlightened financial services companies do act in the best interests of their customers, but there are powerful financial incentives for other companies to put their interests ahead of their clients’ interests, and sometimes some of them do.
Sometimes these companies put pressure on their representatives or agents to take actions that aren’t in the clients’ best interests: using financial incentives and elaborate and clever rationalizations for taking those actions. As employees of such financial services companies, it’s sometimes hard for advisors to resist these pressures and incentives.
This brings me to the second problem with advisors “acting in their clients’ best interests” while also serving as an agent or rep of a financial company: How can their clients know whether their advisor is acting in their best interests?
It’s certainly true that some fiduciary advisors have acted in other than the best interests of their clients. But when they do, their clients have legal recourse, and those advisors face heavy fines, and even jail time in some cases. Consequently, while there are no guarantees, and all clients should monitor the activities of their advisors, the clients of fiduciary advisors have good reasons to rely on the advice they get, at all times.
Changes in securities laws and regs over the past decade or so that make brokers fiduciaries when they charge asset management fees hasn’t really solved these problems. That’s because most brokers have no such duty when “selling” the stocks, bonds and funds that go into managed portfolios, or the insurance products that clients need: and many clients don’t understand the difference, or what it means.
Which brings us to your last point about clients needing insurance. The reason we have professions is that some important areas of our lives—our health, finances, legal dealings, etc.—are so complex that most people need help to deal with them, yet lack the knowledge and understanding to evaluate whether they are being treated competently or in their best interest.
Insurance is one of those areas. In my view, like the other areas of personal finance, insurance consumers need a professional who is legally obligated to act in their best interest when making decisions about their coverage. I have no doubt that you are probably acting in the best interest of your clients, but without a legal obligation to do so (and some pretty big financial incentives to act otherwise), how can your clients be sure?