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Fiduciary Standard Should Be Based on How Brokerage Industry Works

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Here are three follow-up comments about my March 4 blog, The Case Against Fee Disclosure: Good Idea; Bad Timing, which explore the issues surrounding the selling of securities and how that might be handled in more client-centric ways.

The first comment, from Teresa Vollenweider, was posted to my blog on, while the other two were posted on our blog discussion on LinkedIn.   

If a client asks a broker masquerading as an advisor, what his/her ALL-IN fees are, will the client get a truthful answer? Or is the modus operandi of the B/D disguised as an RIA to never truly disclose the total amount of fees paid by their so-called clients? 

This issue was also raised on LinkedIn by Greg Jones, the retired founder and managing principal of Altavista Wealth Management, Inc.: 

All fees, transaction costs, bond mark-ups, sales loads, internal management fees, etc. should be transparent and comparison-shopped for by a broker ‘advising’ any client.

To my mind, this is the key question in the current “fiduciary standard for brokers” discussion. It’s one of those issues that seems both obvious and simple, on the surface. Yet in actual practice, I wonder if it would even be possible to execute effectively.

Part of the reason for this is the vast difference between a broker/client relationship and a client’s relationship with an independent RIA. In an RIA relationship, the advisor (and his/her firm) gets paid one way: a clearly stated fee on a regular basis (whether hourly, retainer, or a percentage of AUM). In return for this fee, the advisor is responsible to meet their clients’ financial needs with the best possible financial products and services for the lowest possible costs.  Yes, the highest quality vs. the lowest cost is a judgment call: one that the advisor is paid to make in the client’s best interest. 

A brokerage relationship is very different. For starters, the client pays the brokerage firm, and then the firm pays the broker. And the firm gets paid many ways: commissions on sales, fees on AUM, trading commissions on securities, mark up on principal trades, loads and overhead on proprietary products, due diligence and marketing fees on mutual funds and annuities, etc. etc.

What do you think the chances are of BDs disclosing all those costs and fees that come out of client portfolios one way or another? And how could anyone monitor whether all the costs were disclosed?

What’s more, because a broker is an employee of the BD, their firm pays the broker a percentage of the commissions and fees generated by their clients, which range from 30% to 95%. That’s a pretty big swing; and a pretty big incentive to recommend the products that the firm wants recommended.

How could anyone calculate the cost to the clients of this conflict? 

Also on Linkedin, James Holland of MillenniuM Investment & Retirement Advisors gave voice to the brokers’ side, with an industry standard response:

…Can we please stop putting a negative connotation on SELLING? Everyone does it. I do not care what you do for a living you are SELLING, whether it be a product, a service, an idea, a solution or yourself you are selling. Plan sponsors need to be sold which when done with honesty and integrity is just another word for educating.

To this, I can only respond: Well, yes. And no. As I’ve written—and said—many times: there’s nothing wrong with selling. As the cliché’ goes: some of my best friends are salespeople. And many salespeople do their jobs with loads of integrity. But the issue isn’t whether on some level we’re all salespeople. It’s fully acknowledging the realities of a sales relationship. 

When we go to buy a car, most people don’t have any confusion about their relationship with the car salesperson: they work for the car dealer, and their job is to sell us the most expensive car they can, or another car that their dealer wants sold soonest. They may be very nice and helpful, but we all know they aren’t really working for us. 

The financial services industry, and brokerages in particular, have spent a gazillion dollars to convince retail consumers that they are getting “financial advice,” without having the responsibilities of fiduciary advisors. That means a broker’s integrity is compromised from the get-go: their employer actively wants people to believe they are “advisors,” when they aren’t. And while I like to believe that some brokers do act in the best interests of their clients, they are bucking a very powerful system. 

Consequently, I have doubts about whether brokerage clients can reasonably rely on brokers to act in their best interests, or continue to do so. While there’s nothing wrong with sales, there is a problem when clients are being sold to, but believe they are getting fiduciary advice.

In my view, the best solution would be a Glass-Steagall type of law that would prevent businesses that provide retail financial advice from being economically affiliated with businesses that manufacture and/or sell retail financial products.

That way, investors/clients would have a clear choice between buying a security from a salesperson or getting fiduciary financial advice from an advisor.


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