Deconstructing one broker’s take on a fiduciary standard

I recently received an email from a Texas broker, who was responding to my column in the February issue of Investment Advisor magazine titled, A Simple Solution: Let’s Call an Advisor an Adviser.

The broker raises some interesting points about the issues surrounding a fiduciary standard for brokers—and illustrates a few as well. 

“I read your article in the recent IA magazine. While I agree the solution is more educational than trying the proverbial round-peg-square-hole, a large addition to the problem with education is what to do with folks like me.”

Actually, the point of my article wasn’t about education at all (I guess I’ll have to work on writing with more clarity). Rather, it was about the “confusion” created by allowing non-fiduciary salespeople to call themselves “financial advisors” which sounds very much like ’40 Act fiduciary “investment advisers” to most retail investors.

I think the SEC’s failed attempts over the past 10 years to “educate the public” on this distinction is pretty good evidence that “education” is not the solution. 

“I often have to explain to clients and prospects that if you want the do-it-yourself BD model I am a Broker or technically a Registered Representative (non-fiduciary), not an Advisor (fiduciary). Most retail clients understand this pretty easily.”

I don’t know what this gentleman means by “understand” here, or how he determines that his clients know that he isn’t a “fiduciary,” or even have the slightest inkling as to what a “fiduciary” is.

Over the years, I’ve probably asked hundreds of people—from school teachers to doctors, lawyers and the very wealthy—and I have yet to find anyone who doesn’t believe that their broker has a legal duty to put their (the clients’) interests ahead of the broker’s or their firms’ interests. And, as we all know by now, this finding has been supported by survey after survey.

Then the Broker goes on to provide an excellent description of the problem that the current Department of Labor proposal is intended to solve.

“However, when it comes to [pension] plans, the confusion is almost inescapable. ‘Ms. Client, if you choose the plan from Principal/Mass Mutual/etc. I am a Broker to your company. If you choose the plan from Morningstar/Loring Ward/etc. I am an Advisor and as such I have limited 3(21) Fiduciary responsibilities.  “Of course, you can purchase 3(21) Fiduciary responsibility from a third party if you chose a plan I am brokering to you, but I cannot service in that position. The total fees are the same, but with the P/MM/etc. plan the fee is charged as a commission on the funds. On the M/LW/etc. plan, the fee is charged outside of the funds, but the fund fees are less. “In both options the participants pay the fees out of their accounts. It just looks different on the reporting.’ Perfectly clear, no doubt to all plan administrators. Heck, it’s often not clear to me.” 

He makes a powerful case for why this situation needs a better solution. I’d just make one observation. While our Broker points out that the “fees” are the same in both cases, notice that nowhere in his description does he mention that the services rendered are not.