My last blog, Are Brokers Really as Anti-DOL Fiduciary as Their BDs?, was about a survey by the Institute for the Fiduciary Standard of “advisors’” attitudes about the DOL’s fiduciary proposals. The survey found that on the three major concerns of the Financial Services Institute—acknowledging fiduciary status, reasonable compensation, and disclosing fees and expenses—67 percent, 81.5 percent, and 55.4 percent of the 251 brokers polled were either “neutral about them, or found them reasonable.”
Those findings prompted Institute president Knut Rostad to conclude: “The reason why brokers and BDs appear to hold such divergent views of core fiduciary requirements may be that brokers don’t like hearing the notion that putting investors’ best interests first is ‘unworkable.’”
In response to that blog, the commenter Watching Out posted a couple of interesting points. I’ll address them individually.
Watching Out: “There is a difference between the behavior of a firm and its reps. I am somewhat positive, or maybe a little hopeful, that you would agree that a vast majority of brokers do the right thing for their clientele.”
What Your Peers Are Reading
I have no doubt that many brokers do want to do right by their clients. Yet it seems to me that there are pretty big differences between what “the right thing for their clients” means in the brokerage world, and what it means in the independent advisory world.
In my experience, brokers do try to recommend “investments” that make money for their clients (that’s how they keep them as clients). Yet financial services is different from other industries: while we call investments “products,” they aren’t really products, like a car or a computer. Instead, investments are contracts: clients give their money to financial services firms (BD, bank, insurance company, RIA, etc.) and those “advisors” promise to grow it into more money, which clients can take back at some later date, or dates.
Contrary to a car or computer, where no matter how much you pay for it, you still get the “product” you wanted to buy, in financial services, the costs paid by the investors—both up front and ongoing—greatly affect what the investors ultimately end up with. Consequently, investors’ “best interests” depend to a much larger degree on the costs of financial services “products” than they do in many other daily transactions.