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Fiduciary expert Ron Rhoades

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Ron Rhoades Makes 5 Predictions for the Future of Advice

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“You can’t serve two masters: Under the SEC, you can be a fiduciary for part of the [client] relationship … and then have another account that’s a brokerage account. [But] you can do some really bad stuff because a different standard applies,” fiduciary expert Ron A. Rhoades argues in an interview with ThinkAdvisor.

Commenting on a number of industry issues — and sparing no criticism of the Securities and Exchange Commission — the longtime fiduciary advocate, professor, attorney and financial advisor makes five major predictions regarding the future of financial and investment advice in this interview.

Among them: “Regulators will eventually concede that being a distributor of investment and insurance products is contrary to acting in a customer’s best interest” and that “no-commission annuities will drive sales of variable annuities and fixed annuities; fee-only RIAs will expand the market for purchases.” 

Rhoades, associate professor of finance and director of the Personal Financial Planning Program at Western Kentucky University, is also a financial advisor and education content specialist at ARG Investment Services, an RIA.

In the interview, he calls the SEC’s Customer Relationship Summary form “atrocious.” 

Form CRS, which firms have been required to furnish to clients since 2020, provides no way for a consumer to “tell the difference between, for example, “a product seller and a fee-only advisor,” he says.

ThinkAdvisor recently interviewed the multi-award recipient and prolific author, who was speaking by phone from Kentucky.

What is blocking consumers from getting sound financial advice tailored to their goals and needs?

“There are still a lot of people saying they’re fiduciaries but who are just product [salespeople],” he maintains.

“It’s still way too difficult for a consumer to tell the difference between someone they can really trust and someone they can’t.”

He looks forward to resolution when “the field of financial planning and investment advisory moves closer to becoming a true profession.”

Here are excerpts from our interview:

THINKADVISOR: Let’s first discuss your prediction: “Regulators will eventually concede that being a distributor of investment and insurance products is contrary to acting in a customer’s best interest.”

RON RHOADES: You can’t serve two masters: If someone has gained your trust and confidence, you should be willing to continue to be their trusted expert, a fiduciary, at all times in the relationship.

The problem is there are still a lot of people saying they’re fiduciaries but who are just product [salespeople].

The whole concept of dual registration is not a good one as it’s applied now. When you develop a relationship of trust and confidence with [an advisor], you’re likely to continue to trust them even if the information you receive is contrary to your best interest, [substantial] research shows.

If someone does a financial plan as a fiduciary, for them to implement it by selling you expensive products that are often of a proprietary nature, they’re basically not adhering to the duty of loyalty.

Consumers need to know who a fiduciary is and who a product salesperson is. If they ask, “Are you a fiduciary?” the response is “I’m legally bound to act in your best interest.”

Have you always been opposed to “hat-switching”?

Yes. And the CFP Board doesn’t authorize it. They say that once you’re a fiduciary, you’re a fiduciary for that client, period.

But under the SEC, you can be a fiduciary for part of the relationship, maybe for an investment advisory account; and then you can have another account that’s a brokerage account. 

You can do some really bad stuff because a different standard applies.

Hat-switching is confusing to clients, no doubt?

The SEC says you’re supposed to be clear with your client when you’re a fiduciary and when you’re not. 

I’ve never met a client who said, “Oh, my broker, who’s acting as my dually registered [representative], told me he just switched [hats] to a fiduciary.” That just doesn’t happen.

It really creates a lot of trust to say to a consumer: “The only compensation I’m going to be receiving is from you. I don’t receive compensation for a product or security that I recommend to you.”

That’s the way fiduciary duties are supposed to work. But unfortunately, the SEC over the decades has allowed fiduciaries to quote-unquote manage their conflict of interest.

“Manage” most of the time just means [to] disclose conflicts of interest. How do you “manage” conflicts of interest? 

If you’re a fiduciary, basically that means you need to get the informed consent of your clients to have a conflict of interest — but under no circumstances would an informed client ever consent to being harmed.

That’s the test that should be applied.

What do you think of the SEC’s Form CRS relationship summary?

It just muddies the water.

Under that document, there’s no way a consumer can tell the difference, say, between a product seller and a fee-only advisor.

In fact, the SEC would apparently even allow you to say you’re a fiduciary in that document [if you’re not]. That’s kind of crazy.

How will this play out?

What is likely to occur is that there will be a binding declaration or disclosure by each person either as a product or securities salesperson or as a fiduciary.

Hat-switching should be prohibited — except in rare circumstances.

Next prediction: “Large broker-dealer firms continue to migrate into the RIA space.”

I’m talking about firms like Schwab, Vanguard, Fidelity, Merrill Lynch, Morgan Stanley and UBS. They’re all dually registered or have an RIA affiliate.

Most advisors who work at these firms are doing fee-based accounts, which is more than half the business of the large wirehouses.

They’re doing more fee-based accounts than commission-based business, on average.

Advisors who practice as true fiduciaries will [find it] increasingly difficult when pressure is put on them to push products and securities that are proprietary.

If you work at such a firm and are being pressured to meet certain quotas, that’s going to rub on you.

So instead of adding to your company’s bottom line and hurting your clients, you can go out into the marketplace, where there are thousands and thousands of products, some really low-cost, and [choose from those].

Where do young advisors want to work?

New talent isn’t attracted to firms where the survival rate is often less than 25%. Rather, they‘re attracted to registered investment advisors, where the retention rate for new hires is 90%.

I train my students to become financial advisors and look to place them with firms that are going to invest in and train them and also have a promotion path, including to become an equity owner of the firm someday.

These are firms where they have a very good probability, 95% or better, of staying employed.

Next: “No-commission annuities will drive sales of variable annuities and fixed indexed annuities. Fee-only RIAs will expand the market for purchases of no-commission variable annuities, including registered index-linked annuities, or RILAs, and FIAs.” Why will this occur?

Because they have so much cost embedded in them, commission-based [annuity] products don’t perform very well. 

But once you strip out the commissions and some of the riders and make them low-cost products, they become pretty attractive as an asset class.

The fixed annuity is a good investment concept. I’ve just never liked how the insurance companies were implementing them.

What’s the biggest benefit of the annuities you’re discussing?

I like to call these [annuity] products Great Depression counters because they help preserve the value of the portfolio if we have a period of great depression.

They can serve as a buffer in a portfolio if the large non-option portion of the strategy is invested in safe fixed income securities.

Up until recently, there wasn’t a lot out there other than U.S. Treasurys that you could invest in to basically counter [a great depression].

The downside risk is that interest rates have gone up recently, so the value of bonds with an average duration of nine or 10 years has fallen.

But that downside risk is capped [with the above annuities].

Over the very long term, these products have the potential to exceed bond returns, but they possess returns lower than equities, making them lower-volatility products — an interesting asset class to add to an investment portfolio.

Another prediction: “Flat annual fees will continue to grow and become more prevalent for financial planning.” Why?

The success of XY Planning Network is a testament to this approach.

Flat fees for investment portfolio management or lower AUM fees will result, once financial planning is regarded as a separate service with separate fixed or hourly fees.

If you’re doing an IRA rollover, for example, and looking to do financial planning for that client and manage their assets, the regulators are going to say, ‘We want you to separate out those fees so the client can see and make a meaningful comparison of the portfolio management services and whether they really need them or not.”

That’s a less conflicted model. In a way, I agree that it’s more fair to the client.

What do you think of the AUM model?

Flat-fee and AUM are both good models. But consumers probably feel better under a flat-fee model. It doesn’t tend to lower the overall fees paid. 

You have to be very transparent upfront on what the fee is and why you’re charging it. You have to justify it more.

There’s no one perfect model out there.

What are your thoughts about the hourly fee model?

[An advisor] doesn’t really get compensated for their expertise using that model. I might give some incredible advice in 15 minutes that took me a lifetime to learn. 

Whereas somebody else might be able to give the same advice doing five or 10 hours of financial planning and research and analysis.

Finally: Trust will continue to grow in financial advisors once consumers will be able to make the distinction between financial consultants [or some similar term], a fiduciary or a product salesperson.

More consumers will place trust in personal financial advisory. Demand for financial and investment advice will then soar.

Consumers are starting to ask the right questions, such as “Will you be a fiduciary to me at all times during the course of our relationship?”

Consumers will increasingly require the answers to these and other questions in writing.

In a survey about whether people use a financial advisor and why or why not, [a frequent answer] for not using one was that they don’t believe they can trust them.

If you can get away from Form CRS [relationship summary], which is atrocious, and just have a simple form that asks a couple of questions, one would be, “Will you be a fiduciary to me at all times?” 

When an advisor tells a client they have a conflict of interest, I would think many consumers get turned off. Do they?

The fee-only advisors have a marketing advantage, obviously, in that regard.

But every advisor has a conflict of interest when it comes to setting their compensation.

We’ve seen more and more advisors migrate to the investment advisor side and also an indication of some compression, whether it be from robo-advisors or hybrid advisors, like Personal Capital or Schwab or Vanguard, with low-cost financial advice platforms.

Those don’t give comprehensive advice, but it’s probably what 90% of what people need.

The marketplace is working. 

But it’s still way too difficult for a consumer to tell the difference between someone they can really trust and someone they can’t.

Over time, any diminution that has occurred in the fiduciary standard will eventually be corrected, as the field of financial planning and investment advisory moves closer to becoming a true profession.