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Regulation and Compliance > Federal Regulation > DOL

DOL’s (Possible) Loss Could Be Your Gain

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At the time of this writing, many independent advisors and consumer advocates are lamenting attempts to dismantle the Department of Labor’s new fiduciary rules at the hands of the Trump administration and the Republicans in Congress, who’ve responded to the urging of the brokerage and insurance industries. I have a different take on this.

I believe the current actions will create the biggest boom in the independent advisory world since its transition to asset-under-management, fee-based compensation back in the late 1980s.

As I’ve written before, one of the biggest disappointments of the past decade has been the outcome of the Financial Planning Association “victory” over the Securities and Exchange Commission in its broker-dealer exemption (or “Merrill Rule”) lawsuit. You might remember that back in 1999 or so, at the urging of the brokerage industry, the SEC attempted to expand the so-called broker exemption to the Investment Adviser Act of 1940. This regulation requires investment advisors to act as fiduciaries for their clients, but exempts brokers who are providing financial advice “that is usual and incidental to the sale of securities.”

Merrill Rule ‘Victory’?

In 2004, the FPA filed suit against the SEC, maintaining that it had no jurisdiction to alter existing securities laws, and in 2007, in one of the biggest David-versus-Goliath stories in recent memory, the District of Columbia Circuit Court agreed with the FPA.

The FPA’s victory was heralded by many observers, including this one, as a demonstration of the financial planning profession’s commitment to sound financial advice for all retail investors.

Unfortunately, things didn’t turn out that way. In the intervening decade, it’s become clear that the FPA’s “victory” has instead created a tremendous marketing advantage for the brokerage industry. Had the FPA lost, it would have created a major news event — “brokers never have to act in the best interest of their clients when they give advice or manage portfolios.” Independent RIAs could have used this to market their client-centered differences. But as things stand now, brokers can claim to be fiduciaries, and not one investor in a thousand will understand that they are only fiduciaries when they are giving portfolio advice, not when they are selling the investments that go into those portfolios.

I’m giving you this ancient history lesson because I believe the independent RIA industry is facing a similar situation today. Only this time, it’s the brokerage industry that’s made the mistake.

Brokers’ Bad PR Good for RIAs

Regardless of the outcome of the current attacks, the DOL and its new rules have created unprecedented public awareness about the importance of client-centered fiduciary advice.

In my Jan. 4 blog on, “Selling Fiduciary: A Prototype for Independent RIAs,” Dan Moisand, managing partner at fee-only financial planning and wealth management firm Moisand Fitzgerald Tamayo, captured what I and many others are hearing from advisors all over the country: “More and more clients and prospects are asking about a ‘fiduciary duty.’ And even better, those clients and prospects understand what it means: financial advice in their best interest.”

By torpedoing the DOL rules, the brokerage industry and its advocates have sent a clear message that they are vociferously opposed to acting in the best interest of investors. That’s what we call “bad PR.”

Today’s challenge, and opportunity, for independent fiduciary advisors is how to clearly and effectively differentiate themselves from the brokerage crowd and demonstrate their full-time fiduciary status to clients and prospects. Here are some suggestions:

In my experience, the biggest hurdle to selling clients on independent fiduciary advice is that very few understand how our industry works. Most of the independent advisors I know are big advocates of educating their clients on the principles of personal finance, but I haven’t met many who talk about how the industry works.

Marketing gurus tell us that badmouthing one’s competition often backfires, but in my view making sure clients and prospects understand the differences between your firm and others is essential. The key is to do it tactfully.

For instance, I don’t think many (if any) of us believe that “sales” is inherently bad, as long as the client understands that they are being “sold” rather than “advised.” The issue for investors is to decide whether they want to be sold financial products or to get advice in their best interest about what they should buy.

Of course, it’s not that simple. To make that decision, they need to understand the real-world differences between being sold and getting financial advice. While it’s great that many investors are now aware of the fiduciary requirement to put their best interests first, how many of them really understand what that means and how it affects their financial future?

There are many aspects to a client’s financial best interest (cost, risk, liquidity, needs, goals, plans, responsibilities, etc.), but cost is usually the easiest to explain, and it’s the only factor that clearly doesn’t fall under the broker suitability standard. A chart demonstrating how 1%, 2% and 3% additional annual costs affect a portfolio over 20 or 30 years can go a long way toward showing the difference between fiduciary and non-fiduciary advice.

It’s also important for investors to grasp how various financial services businesses get paid. For instance, brokerage firms and insurance companies either create and sell their own products or sell products from other companies. Either way, the more those products cost the buyer, the more these firms get paid. Hence, there is often little financial incentive to get the best deal for the client.

Contrasting the above scenario with your independent advisory firm, which gets paid directly by your clients, illustrates a major difference. Without any financial incentive to recommend heavily loaded investments — and the major incentive of your AUM fee to keep costs low and maximize portfolio growth — the fiduciary benefit is hard to miss.

Finally, to illustrate how the differences between fiduciary and non-fiduciary (or part-time fiduciary) advice translate into business practices, I strongly recommend summarizing the Institute for the Fiduciary Standard’s white paper comparing Form ADV disclosures of fiduciary RIAs and brokerage firms.

As I wrote in the November 2016 issue of Investment Advisor, “Seventy-six percent of RIAs and 100% of the large financial services firms have ‘a relationship material to their business that creates a material conflict of interest with their clients.’ This generally means receiving outside compensation from the sale of securities or insurance. In contrast, the authors [of a study by the Institute for the Fiduciary Standard] found that the 25 RIA firms with ‘no material conflicts’ also had ‘no registered representatives and insurance agents and reported only receiving compensation from client fees.’” In other words, they were independent RIA firms.

These findings provide a clear, easy way to demonstrate the real-world differences between full-time fiduciary RIA firms and part-time fiduciary businesses; the best part of this analysis is that those statistics come right out of firms’ own ADV filings.

At this point, you’ve set the stage to enumerate all the ways your firm fulfills its responsibility to provide financial advice and otherwise act in clients’ best interests: keeping their portfolio costs as low as possible, working with multiple custodians to ensure competitive pricing, helping them determine their financial goals, creating a plan to attain these goals, keeping their investment risks as low as possible while still creating a strong likelihood that they will reach their financial goals, disclosing any material conflicts of interest and discussing how you mitigate them.

Investors who clearly understand the differences between the fiduciary advice that you and your firm provide versus that of other financial services business models will not only be better clients, but will be better advocates for your firm. That matters more than ever now that the DOL and the brokerage industry have increased public awareness of what best interest is all about.

— Read DOL Won’t Delay June 9 Fiduciary Rule Compliance Date: Acosta on ThinkAdvisor.


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