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Debunking Time: Fiduciary Duty Would be Good for (a Broker's) Business

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In last week’s blog (July 10 on ThinkAdvisor, The Cost of Fiduciary), I applauded NAIFA’s objections to a fiduciary standard for brokers, as voiced in its comment letter to the SEC, for its sheer entertainment value alone (NAIFA CEO Susan Waters responded to my blog with one of her own). 

The highlight of the NAIFA letter was the oldie but goodie that putting the interests of their clients first would be bad for business (I paraphrase). I also mentioned that there were many thoughtful letters in support of such a standard, chock full of investor-centric reasoning and supporting data. Perhaps the best of them (which is saying something), and maybe the best position paper I’ve read on the subject, was submitted by the Financial Planning Coalition (the FPA, NAPFA, and the CFP Board): It’s a virtual delete button for arguments against the standard, and a reboot for the SEC’s attempts to water down an eventual standard through the assumptions in its “request for information.” 

The Coalition’s letter is a remarkable work (see the ThinkAdvisor news article by Melanie Waddell on the letter, along with separate submissions by SIFMA and Schwab, both of whom conducted surveys on the fiduciary standard). The Coalition’s comment declares uncompromising support for a true fiduciary standard “that would apply to both broker-dealers and investment advisers, when providing personalized investment advice to retail customers… … no less stringent than the existing fiduciary duty standard under the Investment Advisers Act of 1940.” And at the same time, the letter takes the SEC to task for trying to skew the outcome: “The Coalition is concerned that the assumptions presented in the RFI are not consistent with this standard.” To wit: “The [The SEC’s] Request For Information makes flawed assumptions about a fiduciary standard,” and “the alternatives discussed in the RFI are not consistent with Section 913(g) [of the Dodd-Frank Act].” 

But the real power of the Coalition’s response is the data it includes to debunk the securities industry’s current main objection to a fiduciary standard: That a fiduciary standard would cost too much. This data comes from a study of brokers and RIAs that the Boston-based Aite Group conducted this spring for the CFP Board, showing that rather than driving up costs and hurting business, adopting a fiduciary standard actually improves a broker’s business. 

In its Study, Aite surveyed 498 advisors, who fell into one of three groups: RIAs, dually registered reps (called fiduciary RRs), and FINRA-only registered reps (RRs). When asking these advisors about their business over the past five years, here’s what they found: 

  • 55% of the RIAs had more than a 10% increase in client assets per year, compared to 46% of fiduciary RRs, and only 29% of RRs.
  • While 38% of RIAs saw annual increases in revenue of more than a 10%, 50% Fiduciary RRs had increases of 10% or more, compared with only 31% of RRs.
  • And 65% of RIAs increased their client “wallet share” more than 5% a year, with Fiduciary RRs at 64%, and RRs at 46%.

What about the costs of being fiduciaries? During this time, RIAs and Fiduciaries spent 5% of their time on compliance, while RRs spend 8%. And the concern that a fiduciary standard will force brokers to drop their less affluent clients? Aite found that the client bases of both the fiduciary and non-fiduciary RRs surveyed ranged between 5% and 10% mass-market clients, concluding: “This indicates that the lack of in-person advisory services available to mass-market clients is an industry-wide problem that is not likely to be exacerbated by the adoption of a fiduciary model.” 

What’s more, Aite reported that “There is already good adoption of the fiduciary practice of asking clients for their informed consent of conflicts of interest among registered representatives:” 57% of dually-registered RRs and 44% of FINRA RRs are already asking their clients for informed consent after disclosing conflicts. In fact, 56% of the registered reps surveyed agreed that “A fiduciary standard of care is appropriate for all financial services providers who deliver personalized investment advice to retail investors.” 

Here’s how the Coalition Letter summed it up: “The Aité Group study supports the conclusion that a uniform fiduciary standard will benefit retail customers and their financial advisers, and will not impose significant costs. Advisers at broker-dealers and at investment advisers who deliver services to their customers under a fiduciary standard find that they experience stronger asset growth, stronger revenue growth, and obtain a greater share of client assets than those that provide services primarily under a non-fiduciary model. Financial advisers who deliver services under a fiduciary standard also do not spend any more of their time on compliance or other back-office tasks. 

So much for the-fiduciary-duty-will-cost-too-much argument. Still, this raises the question: If Fiduciary RRs have so much better businesses than non-fiduciary RRs, why are SIFMA and NAIFA so adamantly opposed to a uniform fiduciary duty for all RRs? For that answer, I suspect we’d need to do a study of brokerage firm profitability on non-fiduciary RRs. 


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