The battle for the fiduciary standard in financial reform legislation took an unexpected turn a couple weeks ago. The National Association of Insurance and Financial Advisors (NAIFA), directly acknowledged a key challenge many insurance brokers face in adopting the fiduciary standard: existing contractual obligations to put the interests of their insurance companies first.
In a Webinar discussion hosted by the American College on March 2, between NAIFA president-elect, Terry Headley, and myself, Headley suggested that brokers with access to a limited number of products through selected companies could not meet the standard. Then, in a March 7 story in The Washington Post, “Financial reform bill likely to lose measure to protect Main Street investors,” NAIFA president Thomas Currey stated that most insurance brokers are contractually obligated to “look after the interests of the company” and that the “original” fiduciary proposal (in Sen. Christopher Dodd’s (D-Connecticut) Discussion Draft legislation) puts a broker in an “untenable situation.” Why? It’s simple: Currey suggested it is not possible to put the client’s best interests first and meet these contractual obligations.
Currey is partially correct. He is correct in noting the obvious conflict. This is part of the ‘facts and circumstances,’ but it is not an analysis. The conflict represented when a broker has access to limited products from selected companies does not automatically preclude a broker from meeting the fiduciary standard. Conformity can only be determined by completing a due diligence process, based on a number of factors, to evaluate how well or how poorly the product(s) meet the investor’s objectives, given the scope of engagement. The process results either will or will not show that the product is fairly and reasonably deemed competitive with other products in the market, and thus in the client’s best interest. Absent such due diligence, it’s not possible to conclude if the product recommendation in this situation–or any situation–meets the standard.
Still, Currey’s observation is important. It may be a first. His candid statement regarding the inherent conflict posed by either proprietary products or by special relationships with product manufacturers is refreshing. He spoke honestly about a real challenge to meeting the standard. While critics have suggested for years that these arrangements are inherently conflicted, the industry has seemed to ignore such criticism.
Yet, there are other concerns expressed by NAIFA about the fiduciary standard that are unwarranted. For example, the basis on which a “look back” at a product recommendation, to determine fiduciary compliance, may be made. The expressed concerns are that if the lowest cost product is not selected or the subsequent investment performance is deemed inadequate, there may be a fiduciary breach.