“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.