NAIFA Blog

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Thank you for your support of the NAIFA Blog, and we hope that you will continue to read us in our new format.

 

To Fee or Not to Fee: Consumers Deserve Choices When Selecting Financial Advisors

Who says it is always in the best interests of consumers to do business with fee-only financial advisors? We’ve seen dozens of financial advice columns “warning” consumers that registered representatives do not adhere to a strict fiduciary standard. For trustworthy (and better) advice, they typically claim, investors must avoid registered representatives compensated by commissions.  Maybe we shouldn’t be surprised that these articles, almost invariably, are written by or rely on interviews with fee-only registered investment advisers (RIAs).

In one recent example, Barry Ritholtz, who in his day job works as chief investment officer at Ritholtz Wealth Management, wrote a column for the Washington Post entitled, “Find a financial adviser who will put your interests first.”

It contains a number of statements about RIAs, registered reps, the fiduciary standard and the suitability standard that are repeated so often in these types of columns that they threaten to enter the realm of “common-knowledge,” even though they may be incomplete, misleading or even wrong.

Let’s take a closer look at several of Mr. Ritholtz’s claims.

• “The fiduciary [standard] legally obligates the registered investment adviser to act at all times for the sole benefit and interest of the client.”
  
  Even if we allow for some hyperbole, this claim stretches an RIA’s fiduciary duty well beyond what it really does. Does anyone believe Mr. Ritholtz and other RIAs, who often call themselves “wealth managers,” receive no benefit from their practices? They are not charities and certainly do not work for the “sole benefit” of their clients. Financial advisors, whether registered reps or RIAs, are professionals who provide valuable services for their clients. They deserve to benefit from their work by being compensated. There is no shame in that.
  
  There is some dispute about whether a fiduciary may receive commissions as compensation. Fee-only advisors, like Mr. Ritholtz, tend to argue that they cannot. A Department of Labor fiduciary rule, which was proposed and then quickly withdrawn in 2011, would have prevented many retirement-fund advisors from receiving commissions.
  
  However, the idea that commissions are inherently not in the client’s interests is wrong. Studies have shown that a majority of middle-market investors prefer commission-based advisory services to paying fees. Many fee-based advisors do not accept accounts with minimum balances below $200,000 (often higher), shutting out many middle-market and small investors. A fiduciary requirement focused on the way advisors are compensated ignores the fact that different investors may benefit from different products, services and payment structures.
  
  
• While Mr. Ritholtz calls fiduciary a “straightforward” standard, in reality it is anything but.
  
  There is no agreed-upon definition of what a fiduciary duty for financial professionals looks like. It is often defined as “looking out for the best interests of the client.” Is the lowest cost investment always in the client’s best interests? How about the most tax-advantaged investment? The one with the highest yield? Would that be a short-term yield or long-term yield? There are no clear answers. And just who decides what is in the client’s best interests? The short answer is the courts. An investor claiming a breach of fiduciary duty can hire a lawyer, file a lawsuit and let the courts decide whether the claim has merit.
  
  
•  Ritholtz writes about the suitability standard that “the bottom line is that the client’s best interest is not part of the equation.”
  
  In fact, NAIFA members who are registered representatives tend to build long-term relationships with their clients. They help clients plan and protect their financial security on an ongoing basis. They also rely on referrals from existing clients to sign on new clients. A registered rep who fails to look out for his or her clients’ interests is not likely to stay in business for long. Their entire business model is based on providing for their clients’ financial security. See NAIFA’s new publication, “Securing America’s Financial Future.”
  
  
• Mr. Ritholtz says that in his experience, the suitability standard “costs much more than services provided under other standards.”
  
  An Oliver Wyman assessment conducted on behalf of SIFMA found: “On average, investors have historically paid 25-75% more for fee-based advisory services than commission-based brokerage, depending on asset levels.” Also, as noted above, many RIAs require minimum balances beyond the means of smaller and middle-market investors. There is a reason they often call themselves “wealth managers.”
  
  Registered reps, on the other hand, tend to work with these under-served markets. A NAIFA-American College survey found that for 53 percent of registered representatives the majority of their securities clients have portfolios of $100,000 or less. For 83 percent, the majority of their securities clients have portfolios of $250,000 or less.
  
  
• The suitability standard “creates an inherent conflict of interest between the adviser and the investor,” Ritholtz writes.” … Any conflict of interest between an investor and their client is extremely problematic.”
  
  Let’s be honest here: despite what fiduciary proponents would have us believe, no advisor-client relationship is completely free of conflicts of interest. Many RIAs are paid a percentage of their clients’ assets under management. It is therefore in the interest of these advisors for clients to maintain assets in their accounts, even if it may be in the best interest of the client to use funds elsewhere — for the purchase of life insurance, for example. That is a conflict of interests.
  
  The key is for investors to be aware of and comfortable with the unavoidable conflicts of interest and to work with an advisor who understands and satisfies their individual needs.
  
  
• “The SEC enforces the standards for fiduciaries – but brokers, aiming to head off more regulations, created the suitability rules themselves.”
  
  Suitability, as enforced by the Financial Industry Regulatory Authority (FINRA), is a very robust standard. Registered reps must comply with regulations covering nearly every aspect of their businesses, from how they communicate with clients to how they interact with senior citizens, from how they advertise to how they keep and maintain records. The suitability standard is governed by no fewer than six FINRA rules and more than a dozen Regulatory Notices and Notices to Members. It requires registered reps to compile and regularly update detailed investor profiles for each client. Registered reps must get to know their clients and have a strong understand of their clients' needs and interests.
  
  Registered reps face near constant scrutiny and annual compliance reviews by their broker-dealers. The broker-dealers, in turn, are subject to detailed FINRA examinations approximately once every two years.
  
  SEC regulation of RIAs is not nearly as stringent. The Commission has said that it examines fewer than 9 percent of investment advisers each year, and more than a third of investment advisory firms have never undergone SEC examination. In addition, SEC rules regulating RIAs are not nearly as detailed and comprehensive as FINRA rules for broker-dealers and registered reps.
  
  FINRA, though it is a “self-regulatory organization,” is certainly no pushover, which is probably why RIAs have fought tooth-and-nail to avoid having to comply with the sorts of compliance rules that registered reps deal with routinely.
  
  
• “But fiduciary rules protect investors from adviser malfeasance, while suitability rules protect brokers from investor lawsuits.”
  
  Unlike a fiduciary standard, under which claims of a breach are investigated only after the fact, the suitability standard is rules-based and forward-looking. It aims to prevent malfeasance before it occurs.
  
  Unfortunately, there are bad apples in every walk of life. A sense of fiduciary duty and the threat of a lawsuit or even prosecution will not deter someone intent on committing fraud. Fortunately, the vast majority of financial advisors, no matter what their standard of care or whether they are paid by fees or commissions, are honest, hard-working and committed to providing financial security for their clients.
  
  Clients are best served by developing a relationship with a financial advisor they can trust – one who is a member of a professional organization, such as NAIFA; one willing to get to know them and understand their financial goals and needs; and one who provides the products, services and compensation method that suits those needs.

Your Health Idaho Working With Agents and Brokers

by Hyatt Erstad, NAIFA Government Relations Committee Chair

Few people understand health insurance better than agents and brokers. In 2013, as Idaho started the process of launching its state-based exchange, Your Health Idaho, NAIFA worked hard to ensure health advisors were incorporated into the system so consumers would have somewhere to turn for help and guidance.

Your Health Idaho chose to embrace the expert advice and added competition agents and brokers brought to the marketplace and during the first year of open enrollment they became a cornerstone of the exchange. When technology glitches with HealthCare.gov crippled many states' ability to sign people up for health insurance, Idaho kept moving forward by relying on agents and brokers and their ability to help clients fill out paper applications.

At the end of Idaho’s first open enrollment period, Idaho was third in the nation per-capita for the number of people who signed up for insurance on the exchange. Your Health Idaho credits agents and brokers for a large part of its success.

As Idaho’s second open enrollment period draws nearer, Your Health Idaho continues to encourage consumers to work with the state’s certified agents and brokers.

“With so many plans to choose from, we encourage Idahoans to find an agent or broker in their community who can help walk them through all the plans Your Health Idaho offers and determine which one is best for them,” Your Health Idaho executive director, Pat Kelly said in a release. “It doesn’t cost anything to work with an agent or broker so take advantage of their knowledge and expertise.”

Idaho is an example of the positive results that can be achieved when health insurance exchanges partner with the agents and brokers in their communities. The video below shows how valuable the relationship has been for Idahoans. NAIFA will continue to work with Your Health Idaho to ensure the partnership that exists in the state remains strong.

 

Your Health Idaho - 2 minute version from Sidewayz Films on Vimeo.

Registration open for 2015 NAIFA Congressional Conference

A message from NAIFA President Juli Y. McNeely, LUTCF, CFP, CLU

Registration for the May 19-20, 2015 NAIFA Congressional Conference is now open!

NAIFA’s Congressional Conference will bring NAIFA members together to learn about the legislative issues that matter to people in our industry, and most importantly, our clients. You will then take that knowledge to Capitol Hill when you meet with your Members of Congress to discuss these issues. For additional information about the Conference, view the FAQs.

The November elections will bring many new elected officials, and the looming threat to the tax status of many insurance products is very real. NAIFA needs our members to attend this Conference to ensure laws and regulations are designed to enhance, not restrict, the ability of middle market families to have access to products and services offered by our members.

Please register now and join me in May where together, we can make a difference!

SEC's Piwowar suggests fiduciary-standard alternative

Requiring more concise disclosure would help protect investors and be a better alternative than imposing a uniform fiduciary rule on brokers and financial advisors, SEC Commissioner Michael Piwowar said in prepared remarks before the National Association of Plan Advisors.

"Even if the Commission were to adopt a uniform fiduciary standard, it is quite likely that investor confusion would continue,” Piwowar said.

NAIFA President Juli McNeely called Commissioner Piwowar’s suggestion “insightful” and “valuable,” as the SEC considers a uniform standard of care. “NAIFA has long believed that appropriate, enhanced disclosures could be a viable answer for how to address perceived conflicts of interest, and could do so, if crafted properly, in a way that does not threaten mid-market investors’ access to products, service and advice—a concern raised by Commissioner Piwowar in his remarks.

“NAIFA also agrees with the Commissioner’s concerns about ‘disclosure overload.’ In NAIFA’s view, more is not necessarily better. NAIFA has previously suggested a two-tiered format for disclosure in which a summary type of disclosure document would be provided to all, with a more detailed, second-tier level of disclosure being available upon the request of investors.”

Piwowar also addressed assertions that suitability is a lesser standard of care than fiduciary, saying: “In the ongoing debate about the need to create a uniform fiduciary duty for broker-dealers and investment advisers, it is sometimes asserted that a broker-dealer’s duties have less ‘teeth’ than an investment adviser’s. That claim overlooks the robust regulatory scrutiny to which broker-dealers are subject.”

NAIFA has long said that rules and regulations imposed on registered representatives of broker-dealers go far beyond those requiring them to recommend suitable products. Registered reps must comply with dozens of rules covering nearly every aspect of their businesses, from how they communicate with clients to how they interact with senior citizens; and from how they advertise to how they keep and maintain records.