Michael Finke co-authored a study showing that a fiduciary standard was not a barrier to offering financial advice to clients of varying wealth levels, a view that the financial services industry has strongly denied. While Finke (left) found middle-class clients were served no less in fiduciary states like California than similarly situated consumers in non-fiduciary states, the Texas Tech professor told AdvisorOne that non-fiduciary financial services are to some extent associated with increased consumer demand.
He cited a study by two Wharton professors of a remarkable episode in India, where through some regulatory quirk, closed-end mutual fund companies were allowed to amortize their expenses, akin to 12B-1 fees in U.S. open-end funds, for about two years. “Producers responded to take advantage of this window,” Finke said.
The Texas Tech finance professor, also a CFP, summarizes the study’s finding as follows:
“In markets where some prices are shrouded, the less sophisticated consumers gravitate toward the products with higher prices while the more sophisticated see through opaque pricing and make better choices. This serves the industry [which] can segment the market by sophistication and sell different products to different consumer groups—for example commission funds to less sophisticated customers and lower-fee, direct channel to the more sophisticated—for example, Merrill Edge.”
So, while Finke acknowledges that commissions motivate the industry to serve middle-class clients, the questions he asks are whether different compensation schemes could provide that motivation and whether consumers should have precise information about what they’re paying for financial advice. And he answers affirmatively to both.