I’ve previously addressed the important topic of operating as a fiduciary. Unlike the legal and medical professions that require practitioners to hold specific degrees and pass comprehensive exams, anyone can call himself or herself an investment advisor. That creates confusion, because consumers of financial advice often wrongly assume that 1) there are standards of expertise and care that all advisors share, and 2) anyone who provides investment advice must act in the client’s best interests.
In reality, however, only professionals registered as investment advisors with the Federal Securities and Exchange Commission (SEC) or comparable state regulators who operate as fiduciaries are legally obligated to put their clients’ interests first. Conversely, salespeople who work for brokerage firms place their loyalty primarily with their employers, not with their clients. That is, while fiduciaries like me always make recommendations that are in their clients’ best interests, brokers must adhere only to a “suitability standard.” This lesser standard requires only that the investment products they suggest and sell “suit” an investor’s financial needs and risk profile. And that leaves portfolios wide open to more expensive, less effective products.
Of course, brokers often counter that they operate on an “open platform” and do not push their firm’s proprietary products with high commissions. However, in a recent New York Times article, Selling the Home Brand: A Look Inside an Elite JPMorgan Unit, Susanne Craig and Jessica Silver-Greenberg reported that although JPMorgan does not restrict investments to their firm’s products, former brokers say that more than half the time, the firm’s proprietary products are found to be the “best choices for clients.”
Craig and Silver-Greenberg go on to describe how, in a three-inch-thick training manual, the nation’s largest bank details how to recruit clients, pitch products, and, ultimately, close the deal–or, as JPMorgan Chase puts it, “get to Yes.” That sure sounds to me like pushing products that may not be the best choices for clients!
While the Dodd-Frank Wall Street Reform and Consumer Protection Act that passed three years ago gave the SEC the authority to “require that anyone providing financial advice act in their clients’ best interests,” the SEC has yet to act. In fact, the deadline for the SEC’s request for information for a cost-benefit analysis of instituting a uniform fiduciary standard for retail investment advice just passed. And, yes, the financial advice industry lined up in predictable fashion on the issue of whether every advisor should adhere to the same fiduciary pledge.
Resisting change, the banks, brokerages, and insurance companies whose business models feature sales commissions that often conflict with clients’ interests worry about losing revenue. And advocating for change, registered investment advisors who already uphold the fiduciary standard that obliges them to act always in their clients’ best interests are concerned that as the SEC seeks to “harmonize” industry rules, the Commission will dilute the current fiduciary standard.
Corrie Driebusch’s recent article in The Wall Street Journal, Two Camps Weigh In on Uniform Fiduciary Standard, reports in greater detail about the positions that industry groups have shared with the SEC. According to Driebusch, the Financial Planning Coalition has cautioned the SEC about weakening the fiduciary standard, particularly as that would move in the opposite direction of reforms made in Great Britain and Australia. Those countries have banned advisors from taking commissions paid by investment companies. And the Securities Industry and Financial Markets Association, a major Wall Street trade group, sees the cost of implementing new rules as a potential issue, although it is not opposed to instituting a higher ethical standard.
Driebusch concludes her article with this sobering observation: “But the banking industry is a powerful force. And there is some skepticism about the SEC’s resolve to ultimately make any move at all.” To support her view, she quotes Scott Smith, an analyst at the Boston-based research firm Cerulli Associates, who comments on the fiduciary debate: “It comes down to: It’s no one’s top priority.”
Let me underscore once again that the clients of Bernhardt Wealth Management will always be our top priority. We will always put our clients’ interests first. That means acting with skill, care, and diligence and avoiding all conflicts of interest. It will be unfortunate if the SEC is unable to harmonize the rules and mandate a uniform fiduciary standard for all advisors. As debate continues in Washington, consumers are left to protect themselves. In spite of the industry’s noise and fury, ensuring your protection is this simple: Work with a fiduciary.