In my November Investment Advisor column, “Why a Fiduciary Duty Matters,” I wrote about a recent study by the Institute for the Fiduciary Standard, which compared Form ADV disclosures of RIA firms ranging from small independents to large institutions.
The results were striking, particularly the comparison of disclosed securities infractions which showed that of the large firms: 56% have been convicted of or pled guilty to a felony (vs. 0% of RIAs), 89% ever had an SEC or CFTC violation (vs. 1% of RIAs), and 89% had been found to have made false statements, omissions, or been dishonest (vs. 1% of RIAs).
The IFFS study also found that the number and magnitude of the above infractions correlated to advisors’ conflicts with their clients’ interests: “Thirty-five percent of the RIAs and 100% of the large financial services firms reported employees who are registered representatives of a broker-dealer. Additionally, 39% of the RIAs and 100% of the large financial services firms reported employees who are licensed agents of an insurance company or agency. These numbers are significant as both brokers and agents owe a duty to their respective employers when they are ‘selling,’ rather than to their clients…. … In contrast, the authors found that the 25 RIA firms (18%) with ‘no material conflicts’ also had “no registered representatives and insurance agents and reported only receiving compensation from client fees.”
As a follow up to that story, I received an email and had a telephone conversation with a financial planner who felt that the above conclusions were unfair with respect to insurance agents. “Many agents, like my firm, are independent agencies. We work with a number of insurance companies, which enables us to find the most appropriate products for our clients. While it’s true that some companies may offer higher commissions or other financial incentives for recommending their products, because we are not their employees, we are under no obligation to choose products that are other than in our clients’ best interests.”
This is a good point, and an important statement. It’s one that I’ve heard quite often over the years, by both brokers and insurance agents.
Just because they have conflicts of interest doesn’t mean that they act on those conflicts, or deliver anything other than advice in the best interests of their clients. And, of course, they are right: it doesn’t mean that.
I’m sure there are many agents and brokers who do advise in the best interest of their clients, despite financial incentives (often quite large ones) to do otherwise. And I have no reason to think that this advisor isn’t one of them.