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 ThinkAdvisor.com, “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.