Why Shouldn’t Investors’ Interests Come First Wealth Manager:
There is a great deal of information surrounding the fiduciary conversation that is just plain incorrect–as in, not fact–whether from ignorance or deliberate obfuscation by parties with huge axes to grind. Here’s what one reader commented in response to that last post:
“Placing all advisors under a fiduciary standard will not automatically bring about positive results. Bernie Madoff was a fiduciary and he perpetrated the biggest financial fraud in U.S. history. Additionally, the imposition of this standard assumes that anyone is capable of determining what is “best” for a client–best when, best compared to what, best as determined by what standard or standards and who determines what those standards are. We will create a hotbed of potential litigation. Additionally, it is very possible the SEC would outlaw commission based sales. Experience in the UK in this type of environment would indicate that tens of thousands of advisors may leave the business, leaving consumers with few choices to go for advice. This is bad legislation. That’s why it needs to be studied further for its impact.”
But I must point out that:
- Bernie Madoff was by no measure a fiduciary. He was a broker/dealer most of his career, and most of his crimes were conducted under NASD-FINRA self-regulation. When he registered as an investment advisor in 2006, he had a fiduciary duty to his clients, but it seems that, sadly, that was never a duty fulfilled. Sad that SEC missed the boat as well.
- No regulation or legislation will deter a criminal. Madoff’s acts were criminal. When we talk about fiduciary duty, we are talking about law abiding advisors doing the right thing by their clients.
- Being a fiduciary does not preclude commission compensation. It is about disclosing all material facts–including compensation. It’s about putting your client’s best interests first. A fiduciary has to act in a prudent manner; disclose conflicts and all important facts; avoid or manage in the investor’s interest all material conflicts; disclose fees and control expenses; follow and document a due diligence process in making decisions; and diversify investments.
- Litigation: if you have fiduciary processes in place, and operate in your clients’ best interests, you should have less litigation, not more. There are many years of court rulings that guide the underlying fiduciary principles.
- Serving investors: if putting clents’ interests ahead of advisors’ interests drives “tens of thousands” of advisors from the business, so be it. Clients will be better off, not worse off. Small clients are eschewed by most broker/dealers anyhow.
- The RIA model, with a defined “scope of engagement,” permits fiduciary advice without ongoing monitoring, if that is the defined engagement. The key is that it is defined, up front, and acknowledged by the client. That’s another myth that’s circulating–that brokers are concerned that as fiduciaries they’ll be responsibile for ongoing monitoring of a client’s portfolio. Indeed, if the scope of the engagement says that ongling monitoring is part of the engagement, they would be responsible for that. (What are those 12b-1 fees supposedly paying for anyhow? That’s a discussion for another day.) Isn’t it better for smaller investors to get fiduciary advice on the investments?
The amount of misinformation circulating about the application of the fiduciary standard to everyday brokerage situations is stunning. For more about these misunderstandings, take a look at Wealth Manager Contributing Editor, and Chairman of The Committee for the Fiduciary Standard, Knut Rostad’s “One Cheer for NAIFA.”
As far as who determines “what is ‘best’ for a client” you are giving advice to, you will need a process in place for determining that the advice you provide is in the best interests of your clients. There are firms that can help you put that knowledge and structure into place in your practice. The investment advisory model has been around–and quite successful–for 70 years, so there is plenty of precedent for advisors being fully capable of putting clients’ interests ahead of their own and still being able to run a profitable firm and make a comfortable living.
There is room, as well, for brokers who don’t want to give advice–they want to sell. Nobody says you must be an advisor. If you want to sell, and not provide advice, then that relationship needs to be established with the client up front. The client and broker both need to acknowledge that it’s a sales–not an advisory–relationship. And, your title would need to reflect that you are a salesperson, not an advisor, counselor, or consultant.