Can Brokers and Agents Act in Their Clients’ Best Interests?

I recently received an email from a veteran financial advisor who took issue with my November Investment Advisor column Why a Fiduciary Duty Matters.

That column is about a study by the Institute for the Fiduciary Standard which compared the Form ADV disclosures by independent RIAs to those of brokerage firms. The short summary of the study is that over the past 10 years, 56% of large brokerage firms have been convicted of a felony, and 89% have been found to violate securities laws by either the SEC or the CFTC. There were no felonies for RIA firms and 1% of them committed a violation. 

To me, the IFFS and many others, these differences seem rather significant. But this advisor did a nice job of expressing the views of those who feel otherwise, writing: “I felt compelled to submit my comments on your recent article. Few if any of the statistics, or data mining, reported in the article convinced me of anything beyond the leanings of your own biases.” 

He went on to offer some specific responses.

Him: “Comparing an RIA firm to a large institution is unfair simply due to the law of averages. The large institution has so many more employees. One should expect more dings to a record. This doesn’t translate into a defense of the large institutions.”

Me: “Your point that large institutions have more employees may be right. Although because there are so many more RIA firms (roughly 20,000 vs. a handful of large BDs), it would be interesting to add up all their employees for comparison; I suspect in aggregate the number of employees would be close. But that doesn’t address the fact that the infractions at the large institutions are so much larger: $4 billion in fines vs. $68,200 for the RIAs).”

That fact is compounded, in my mind, by the larger institutions having much bigger, better funded and more professional compliance staffs. As a result, you’d think it would be much harder to take advantage of the clients at larger firms. That in turn suggests those bigger firms aren’t trying very hard to prevent it.”

In my story, I quoted the IFFS study: “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.”

Him: “The inference is that an advisor cannot recommend or sell an insurance product and be a fiduciary. I always review the life, health, long-term care and disability needs for my clients. The suggestion that I’m more beholden to some insurance company versus my clients is more than attacking.”