The following article was an op-ed piece originally published in InvestmentNews.
The political system in our country is broken.
Sadly, the financial advice industry is following suit.
After a tumultuous, contentious election cycle, the United States is more divided than ever. This division is happening at a time where our country could arguably be at one of its most significant crossroads in its history. The decisions (or indecision) facing our leaders will no doubt change the future of our country. Health care. Foreign relations. Taxes. Social programs. The list goes on. And the financial advice industry is along for the ride.
How One Word is Fueling the Fire
In 1940, the “F” word entered the world of financial advice. Decades later, the industry is at odds with a new rule that attempts to clarify how the word is defined, how it will be enforced, and who it will apply to.
It’s a simple concept. Put the interests of your client ahead of your own. It’s a concept that has divided the financial industry in ways no one could have predicted.
What’s Right with the Rule?
Establishing a unified code of conduct that centers around the notion that financial professionals should have an ethical and legal obligation to act in their clients’ best interest is a no-brainer. Find me a financial professional that feels otherwise and I’ll show you a crook. Unfortunately, there are crooks in every industry. This rule isn’t going to rid the industry of those. The efforts being made by the rule to reduce or eliminate conflicts of interest are spot-on. The fact that the rule includes financial professionals with varying licenses is a step in the right direction as well.
What’s Wrong with the Rule?
The case against the rule has been well documented. It may lead to less product availability. It will increase compliance costs. It opens the door for a bevy of lawsuits (read: brace yourself for more attorney billboards and TV ads). It adds a laundry list of challenges for firms and advisors who operate under a commission-based compensation model. It affects only retirement assets. It will be a disservice to smaller clients. Regardless of whether you agree with any of those statements or not, that’s the case being made by opponents of the rule.
Two Differing Camps
Over the past decade, the debate between fee-only investment advisors and commission-based insurance or securities professionals has heated up. Fee-only advisors routinely chastise their counterparts, citing commissions as a major conflict of interest and the suitability standard as an inferior consumer protection standard. They may also criticize these professionals for being sales-based as opposed to a consultative manner of working with clients.
Insurance professionals and registered representatives may point to product guarantees or the ability to serve a more diverse client base while maintaining a profitable business model. The fiduciary rule would apply to professionals no matter what licenses they maintain. However, it is very clear that those professionals who receive differential compensation (commissions) will be forced to jump through more hoops in order to comply.
I don’t make it a habit to post comments at the end of articles on the web. In fact, I’ve never done it. But I must confess that I read them. I respond, but only in my head, and never in print. I can’t bring myself to engage in the back and forth attacks. It’s always the same nonsense. The sad reality is that the fiduciary rule has only made it worse. What used to be a debate that was kept within the industry has turned into a very public airing of our laundry (which, incidentally, isn’t as dirty as some politicians will lead us to believe). It’s simply creating more distrust and skepticism about our industry and the good that we can and do for people. Let’s face it — our industry has done a lot of healing since the black eye that it was given as a result of the financial crisis. We would be much better served trying to advance the various segments of the industry in a unified way.
Both Sides Are Wrong
It would be impossible for any financial professional to completely eliminate conflicts of interest. Whether you charge hourly, fees for managing assets, or are compensated by commissions, conflict can and will exist.
If you’re so caught up defending your side of the debate that you can’t see the forest through the trees, it may be time to take a step back. Yes, the fiduciary standard is (in theory) a higher standard than the suitability standard. But I can tell you I’ve seen poor recommendations come from professionals who are allegedly adhering to the fiduciary standard – the type of recommendations that wouldn’t even pass the suitability muster. On the flip-side of that, we’ve all seen incentives that have blatantly steered money one place instead of another.
Neither side of this argument is immune to blemishes. Even the industry newcomer, the robo-advisor, isn’t without faults. Somehow asking just a few questions that steer an investor into a predetermined mix of investments qualifies as meeting the fiduciary standard. I suppose it’s the fact that the “robo” part of it is a disinterested party. I’d contend that there’s nothing wrong with an advisor taking an interest in their client’s life enough to ask more than their age, risk comfort, income and net worth to determine how they should begin to handle their finances. Don’t get me wrong, there’s certainly a place for the robo-advisor in our industry, but there is also a place for the human advisor who can take into account ALL of a client’s interests before making a recommendation.
It’s time for our industry to acknowledge the positives that come from the other’s business model. Do we have things that need to be cleaned up in our industry? Absolutely. The first step in doing so is to stop slinging mud at one another and getting each other dirtier. Our clients are counting on us now more than ever – every single one of us.