Does a fiduciary duty really make a difference in the quality of the advice that retail investors get? According to the brokerage industry, the answer is a resounding “No!”
To hear SIFMA tell it, it’s just a matter of differing business models. Worse, over the six years since the signing of the Dodd-Frank Act, industry representatives have claimed that if their brokers were required to act in the best interest of their clients, the costs of advice would go up, access to financial advice would be denied to smaller investors, and (my personal favorite), having to act in their clients’ best interests would, in fact, not be in their clients’ best interest.
Over those years, many proponents of a broker fiduciary standard, including the Obama administration and the Consumer Federation of America, have offered studies of the striking costs of non-fiduciary advice to retail investors. The industry responded with complicated, academic-sounding dismissals of this “evidence,” causing most investors’ eyes to glaze over, and driving them back to watching “Better Call Saul.”
All of this begs the question of whether there isn’t some clear, easily understandable, and hard-to-argue-with data that graphically demonstrates the differences between fiduciary advisors and nonfiduciary or part-time fiduciary advisors. If such data does exist, could it be used as a way for full-time fiduciary advisors to demonstrate their differences to clients, prospective clients and the media? As it turns out, the answers are yes, and yes.
As part of this year’s Fiduciary September, the Institute for the Fiduciary Standard (IFFS) released a study of what various types of RIAs (ranging from small, independent RIAs to large institutions) disclosed in their Form ADVs. The results are, to say the least, surprising. More importantly, they graphically capture the differences between fiduciary and non-fiduciary advice in financial services firms’ own words.
“These data reveal the differences and similarities among RIA firms in how they conduct their businesses,” wrote the study’s authors, Knut Rostad and Darren Fogarty. “Chief among the questions is the degree to which firms minimize conflicts of interest and render financial and investment advice for a fee solely paid by clients.”
Rostad is president and founder of the Institute for the Fiduciary Standard, where Fogarty is a research associate.
To make these comparisons, Rostad and Fogarty collected the Form ADVs (which all registered investment advisory firms file each year with the Securities and Exchange Commission) of 135 RIAs and nine very large financial services firms. The RIAs were chosen from Financial Advisor magazine’s July 2016 RIA Survey & Ranking list of the top 610 RIAs by total assets under management. Only RIAs with $250 million in assets under management or more were considered for the IFFS survey, and then every third RIA on the list was selected.