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Selling Fiduciary Advice to Confused Investors

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Back in the early 1990s, the National Association of Personal Financial Advisors — led by Ron Rogé, who chaired their public relations committee — launched an aggressive campaign to educate the New York financial press about the many advantages of “fee-only” financial advice. At first, his reception was cool, but Rogé et al. persisted and eventually prevailed, inspiring hundreds of articles in the mainstream financial press about the benefits of fee-only advice. It raised public awareness so successfully that by 1998, Merrill Lynch declared that it was converting its retail brokerage unit to “fee-only” in a massive, nationwide advertising campaign, and the financial services industry has never been the same.

Unfortunately, that’s not the end of the story. As I’m sure you’re aware, neither Merrill Lynch nor any of the other Wall Street wirehouses ever did convert to fee-only. What they did do was add fee-based asset management to their service menu, which enabled many brokers to claim that they were fee-only when they were charging fees, while they also continued to charge commissions to the same clients.

This sleight of hand apparently continues to this day: Back in September 2013, Ann Marsh at Financial Planning revealed that hundreds of brokers had listed themselves as fee-only on the CFP Board’s “Find a CFP Professional” website (despite the fact that the misuse of the term “fee-only” violates the Board’s own standards of professional practice).

The impact of NAPFA’s media campaign continues to be felt today in the increased awareness among the media and the public of the benefits of investor protections that result from a fiduciary standard for advisors that is integral to fee-only advice. This awareness resulted in Section 913 of 2010′s Dodd-Frank Act, and the Department of Labor’s new rules for retirement advisors. However, increased demand for fiduciary advice has also led to increased investor confusion: Adding asset management services to their commission sales has enabled some advisors to claim that they are fiduciaries for their clients — just not full-time fiduciaries, a distinction that by all accounts that I’ve seen is lost on the majority of clients.

As we’ve seen with fee-only labels, investor confusion over who is and isn’t a fiduciary — and when — poses a significant marketing challenge for full-time fiduciary advisors: clearly and effectively differentiating themselves from part-time fiduciaries in the minds of investors who are now clamoring for fiduciary advice. Put another way: How do advisors sell full-time fiduciary financial advice?

One organization that has offered a comprehensive solution to this problem is Charles Schwab. On its new website,, Schwab makes the case for fiduciary advice by marrying that concept with “independent” advice. As a long-time advocate of the marketability of independent financial advice (as opposed to the legalistic sounding “fiduciary”), I’m encouraged that Schwab has come to the same conclusion. Yet in execution, the Schwab approach offers as many lessons about how not to market independent fiduciary advice as it does about how to do so successfully.

A visitor to the website is initially presented with the question “What is an independent financial advisor?” followed by this description:

“Independent registered investment advisors (RIAs) are professional independent advisory firms that provide personalized financial advice to their clients, many of whom have complex financial needs. Because these advisors are independent, they are not tied to any particular family of funds or investment products. As fiduciaries, they are held to the highest standard of care — and are required to act in the best interests of their clients at all times. They are registered with either the Securities and Exchange Commission or state securities regulators.”

To sell full-time fiduciary advice, Schwab has chosen the label “independent RIAs.” The term certainly marries independence to a fiduciary standard, but does it really decrease investor confusion about where to turn for bona fide fiduciary advice? While the RIA part is fairly clear, this paragraph offers little insight into what factors might constitute an actual independent advisor or advisory firm. The second sentence offers a few clues — “they are not tied to any particular family of funds or investment products” — and yet this simple statement seems to raise more questions than it answers.

What is an “independent advisor”? Are they always independent of investment products? Seems to me that over the years, more than a few independent advisors have gotten themselves into trouble by offering proprietary investments to their clients. As Schwab does not oversee regulatory compliance for its affiliated advisory firms, I doubt it has any idea whether some of those advisors are involved in offering proprietary products to their clients today.

Although it never really tells us exactly what elements make an independent advisory firm independent, Schwab’s website lists five “key benefits” of independent advisors:

  1. “Customized guidance based on your entire financial picture.” Is it just me or does this sound more like a pitch for CFPs? While many independent advisors are financial planners, others are simply investment advisors or pension consultants or accountants. There are many benefits of independent advice, but this doesn’t strike me as one of them: It’s more a case for independent financial planners.

  2. “A relationship that’s responsive, attentive and personal.” Ditto. Every broker in the country makes this claim. However, this section goes on to say, “And because most of these advisors are entrepreneurial business owners, they hold themselves personally accountable to their clients.” That’s not bad: We all know that small business owners give us some of the best service we ever get.

  3. “A fee structure that is simple and transparent. Independent advisors typically charge a fee based on a percentage of assets managed. This fee structure is simple, transparent and easy to understand. It also gives your advisor an incentive to help grow your assets. When you succeed, your advisor succeeds.” Bingo: One clear fee, putting advisors on the same side of the table as their clients.

  4. “A high level of expertise to support your complex financial needs.” Again, I’m not sure how Schwab knows this about its advisors, and there are absolutely no barriers to any advisor making this claim.

  5. “Your money is held by an independent custodian, not the advisor firm. Independent advisors use independent custodians, such as Charles Schwab and others, to hold and safeguard clients’ assets. For many investors, this provides a reassuring system of checks and balances — your money is not held by the same person who advises you about how to invest it.” Kudos to Schwab for including other custodians, but frankly, can’t virtually every advisor in the country make this claim? Brokerage firms don’t hold your assets, either.

To me, while “independent advisor” is probably the most important term in financial advice, it is basically a description of business or financial affiliation: It states that the firm in question is a stand-alone business, one that derives its revenues solely from its clients. The reason this definition is important is that today, there are various degrees of independence in the financial advisory world. I think we can all agree that W-2 employee brokers at large wirehouses are not independent; what about advisors affiliated with the so-called independent broker-dealers? They own their own businesses. Yet they are still registered reps of their firms, and as such are paid not by their clients but by their BDs, which potentially exert considerable control by varying their payout percentages.

So if there are degrees of advisors’ independence, that means there is ample opportunity for intended and unintended confusion among investors over who is and who isn’t an independent advisor. To truly sell independent financial advice, independent advisors and their advocates such as Schwab need to make valid claims that non-independent advisors can’t make. When we make claims that others can also cite — such as an LPL advisor who owns his or her own firm — it waters down the distinction and weakens the message.

Unfortunately, the addition of “RIA” to “independent RIA” doesn’t solve the problem. Today, many independent advisory firms that are affiliated with a BD also own their own RIAs, which they use when they are wearing their fiduciary asset manager hat. So even though Schwab’s program highlights many of the advantages of independent advice, the term “independent RIA” still leaves way too much wiggle room to solve today’s investor confusion. To my mind, the only clarifying labels are “full-time fiduciaries” or “fiduciary-only” advisors.

— Read Strong Advisor-Client Relationships Drive Growth During ‘Sideways’ Markets on ThinkAdvisor.


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