In response to my July 30 blog The Case for a New Advisor Designation: ‘Fiduciary-Only’ Advisors), advisor Russell Rivera wrote the following email:
“As an advisor fairly new to the business, I find it interesting to read about how some people think about the business itself. However, your most recent article made me want to join the conversation. As a person who offers financial advisory services, I like the ‘fiduciary-only’ label. It shows that I’m on the same side as my clients. I always share that with my clients and prospects. However, I am not ‘fee-only’ as the CFP Board puts it. When it comes to investments, I am. I believe that this is the intention of the ‘fee-based’ moniker.
“However, I do sell commission products. I am sure that we recognize that a proper insurance portfolio to manage risk is appropriate, whether the appropriate products are just term life insurance or include something more complex. But these are commission products. By law, if I sell these products, I may not rebate commissions in any way. And anyone who sells these products will receive a commission. Why shouldn’t it be me?
“So the question is, what would a ‘fiduciary-only’ label mean? Can a person act ethically like a fiduciary while not being legally required to do so? If I refer out all my insurance business to maintain a ‘fee-only’ label, will that necessarily result in doing the best thing for the client? It seems that while there is a legal definition of fiduciary, it means nothing without the ethical actions as well. The labels can be distinct.”
Here’s my response: Russell, you raise some very good, interesting, issues. I’ll give you my views on them, but please remember, these are just my opinions, and others in the industry would undoubtedly take issue with them.
First, I know many good, ethical, client-centered financial advisors who are compensated by both fees and commissions. With that said, I have two basic problems with this approach as a model for a profession of financial advisors.
My first problem is that by having a license to sell securities, or insurance, an advisor is legally a representative or an agent of his/her affiliated companies. That means they have a legal duty to represent the interests of those companies.
Certainly, some enlightened financial services companies do act in the best interests of their customers, but there are powerful financial incentives for other companies to put their interests ahead of their clients’ interests, and sometimes some of them do.
Sometimes these companies put pressure on their representatives or agents to take actions that aren’t in the clients’ best interests: using financial incentives and elaborate and clever rationalizations for taking those actions. As employees of such financial services companies, it’s sometimes hard for advisors to resist these pressures and incentives.