Lots of good comments on my Aug. 30 blog (The Wall Street Journal’s Contribution to the Fiduciary Argument), and not all of them came from folks who agree with my point. While, “NotEntitled” was also clearly not a big fan of my position, he or she did make two valid points that are worth exploring.
The first point succinctly captures the essence of the entire current fiduciary debate:
“Brokers are brokers. Advisors are advisors. Consultants are consultants. Some professionals are all of the above. But not all brokers are providing advice or consulting. So why force all sales agents to adhere to a fiduciary standard?”
If it were only this simple. But, come on, we all know that it isn’t, don’t we? In addition to the practical experience of virtually everyone reading this (including me), study after study has demonstrated well beyond a shadow of a doubt that the vast majority of retail investors do not understand that brokers are, in fact, simply salespeople who do not have a legal duty to act in their clients’ best interests.
What’s more, in my years of experience covering advisors and brokers, I’ve come to realize that this “confusion” is no accident: from titles such as “financial advisor,” “trusted financial advisor,” “financial consultant,” “wealth manager,” and “financial planner,” to their multimillion dollar ad campaigns, Wall Street appears to do everything in its considerable power to confuse the issue.
While I’ve grudgingly admitted that, if worded properly, disclosures spelling out the differences between brokers and advisors could solve the problem, I don’t think anyone outside of SIFMA, FINRA, and the SEC truly believes that clear-enough wording will ever be forthcoming. So the simple answer to NotEntitled is that if securities salespeople would only act like salespeople, we wouldn’t be having this discussion.
The second good point raised by NotEntitled is this comment about why high fees may not be a bad thing:
“…it very well could be appropriate if the broker/advisor/provider is providing services that are expensive to provide, and maybe the plan sponsor ended up with a much better plan design that saves the company more than the [high fee]. Fiduciary responsibility mandates that the plan/participants/sponsor are charged APPROPRIATE fees, not the cheapest fees.”
Hard to argue with that. Still, the question remains of whether the company or the plan participants did, in fact, end up with a better plan for less? Because, under the suitability standard, brokers aren’t required to be able show that the higher fees were justified. In fact, whether fees are appropriate or not, isn’t considered at all under suitability, which leaves brokers and their firms free to charge any fee that the customer is unsophisticated, or trusting, enough to pay: Remember 4% wrap accounts?
The fact is that only under a fiduciary standard do “reasonable fees” become an issue at all. Which raises the question: “Just what are we trying to protect retail investors from?” To hear the Wall Street Journal tell it, they only need to be saved from being “systematically cheated,” which doesn’t seem to include higher fees. But how can it not?
If someone cons you into paying more for a car than it’s worth, or more to build a house than it should have, won’t you feel cheated? So why won’t clients feel the same way about recommendations from someone they believe is representing them? The obvious answer is that they would, if they knew what we know. But they don’t—which is why they need fiduciary protections.