A study released in early March by two academics goes a long way in settling one of the stickier questions surrounding the fiduciary debate—namely, does a stricter fiduciary standard increase costs to the point of pricing certain registered reps out of the market.
The answer is no, according to Michael Finke and Thomas Langdon.
Finke, of Texas Tech University and University of Missouri at Columbia, and Langdon, of Roger Williams University, “find that the number of registered representatives doing business within a state as a percentage of total households does not vary significantly among states with stricter fiduciary standards.”
The study was funded in part by the fiduciary educator fi360 and the Committee for the Fiduciary Standard.
In the the 23-page report, tilted “The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice, the authors ”find no statistical differences between the two groups [states with strict fiduciary standards versus those with lax fiduciary standards] in the percentage of lower-income and high-wealth clients, the ability to provide a broad range of products including those that provide commission compensation, the ability to provide tailored advice and the cost of compliance.”
For the purposes of the study, Finke and Langdon divided states into three categories: 1) those that “unambiguously” apply a fiduciary standard to brokers in that state; 2) those that unambiguously apply no fiduciary standards to brokers; and 3) states where there is evidence of a limited fiduciary standard applied to brokers.
Four states have imposed an unambiguous fiduciary standard on broker-dealers (fiduciary states): California, Missouri, South Dakota and South Carolina.
States that do not impose a fiduciary standard on broker-dealers are Arizona, Arkansas, Colorado, Hawaii, Massachusetts, Minnesota, Mississippi, Montana, New York, North Carolina, North Dakota, Oregon, Washington and Wisconsin.
The remaining states impose either a limited fiduciary standard, or the courts have interpreted state law to impose duties that appear to be fiduciary in nature. In the study, Finke and Langdon refer to these states as “quasi-fiduciary states.”
The Financial Services Institute and other industry advocacy organizations have long argued that the imposition of a fiduciary standard and the attendant higher costs would limit the ability of middle- and lower-income Americans to receive “affordable, quality financial advice” at a time when demand for such advice is rapidly growing. But the authors, referring to a “saturation rate” (or the ratio of the number of registered representatives to households in each individual state) find that “empirical results provide no evidence that the broker-dealer industry is affected significantly by the imposition of a stricter legal fiduciary standard on the conduct of registered representatives.”
Finke and Langdon acknowledge the opposition of the industry “to the application of stricter regulation suggests that agency costs that exist when brokers are regulated according to suitability are significant.”
But, they add, “imposition of a universal fiduciary standard among financial advisors may result in a net welfare gain to society, and in particular to consumers who are ill equipped to reduce agency costs on their own by more closely monitoring an adviser with superior information, although this will likely occur at the expense of the broker-dealer industry.”
The industry is likely to operate in much the same way after the imposition of a fiduciary standard as it did before the widespread adoption of such a standard.