Why do wealthy investors use firms that don’t represent their best interest?
It is impossible for commissioned-based investment houses and a long list of banks, insurance agents and others to look out for the best interest of consumers who depend on investment professionals for advice.
How can they put their clients first, when their compensation ties directly to commissions received from selling the financial products they recommend to clients?
For this very reason, U.S. Sen. Herb Kohl (D-Wis.) sought out added protection for consumers as part of the standards of care for investment advice required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Sen. Kohl is noble in his efforts to protect consumers from being ripped off when investing their money with the likes of Bernie Madoff. But by simply extending the current fiduciary standard of conduct found in the Investment Advisers Act of 1940 to brokers and broker dealers, he would create an unenforceable regulation. Wall Street firms are fighting against falling under the confines of the fiduciary standard of conduct. But these firms would fight even harder if proposed regulations had some teeth.
Sen. Kohl and the SEC should require all investment advisors to tell clients in writing their total compensation for the advice they offer consumers. Transparency standards by all who recommend investment vehicles is the only way to ensure consumers are fully informed and the only way to provide a meaningful structure to audit whether advisors are truly representing the best interests of their clients or themselves.
Think of it in terms of buying a house. Real estate brokers have the homebuyer sign a document declaring the real estate broker represents the seller – not the buyer. The buyer is informed and understands no matter what the broker says, all information must be considered against the fact that the broker represents the interest of the seller.
As the Securities and Exchange Commission considers how to enforce the Dodd-Frank Act signed into law earlier this year, there clearly is a lack of understanding by consumers, which likely is the driving force behind the lack of public input to the SEC on this issue. Most of the input to the SEC on this issue has been from the investment community.
A recent national survey shows that most U.S. investors are confused about which financial professionals are required to operate under a “fiduciary standard,” requiring the financial professional to put client interest ahead of their own. The following are key findings of the survey of 1,319 investors conducted by the Consumer Federation of America, AARP, National Association of Personal Financial Advisors, North American Securities Administrators Association, Certified Financial Planner Board of Standards, Inc., Investment Adviser Association, and Financial Planning Association.
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60 percent of U.S. investors mistakenly think that “insurance agents” have a fiduciary duty to their clients.
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66 percent of investors are incorrect in thinking that stockbrokers are held to a fiduciary duty.
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76 percent of investors are wrong in believing that “financial advisors” – a term used by brokerage firms to describe their salespeople – are held to a fiduciary duty.
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75 percent of investors think the fiduciary standard is in place for “financial planners” and 77 percent say the same about “investment advisors.”
Undoubtedly, fear-mongering by investment firms, banks and insurance companies selling annuities and other financial products to people who don’t fully understand what they are buying will continue to create confusion in the marketplace on this issue. For clearly defined recommendations on what needs doing to protect consumers who invest through brokers and other commissioned-based advisors, consumers can visit NAPFA.org.
As this issue unfolds in the public discourse, you might hear that proponents of a fiduciary standard of conduct, such as NAPFA, are often accused of seeking to further their own self-interest. Nothing could be further from the truth. NAPFA-Registered Financial Advisors, who have all adopted NAPFA’s fiduciary oath, are currently able to gain significant market share from non-fiduciary advisors, simply because consumers of financial advice desire to place trust in a financial advisor who does not receive compensation based on what investment vehicles are selected.
Imposing the fiduciary standard on broker-dealers and their registered representatives will negate much of this advantage, which fee-only fiduciary advisors possess today. Despite the potential negative personal economic consequences to NAPFA-Registered Financial Advisors – should fiduciary status be extended to all providers of personalized investment advice to consumers – NAPFA and its members view this as an important issue to individual Americans, as well as to capital formation and the future economic growth of America’s economy.
To illustrate and clarify the difference between “fee-only” and “fee-based” advisors, consumers should know the following before making an investment decision. Actual fee-only advisors are compensated only on fees pre-determined and disclosed with the client. Fee-based advisors charge fees for some services, but also receive other compensation, such as commissions, finder’s fees, commission-splitting, and soft-dollar arrangements with insurance companies, brokerage firms and other third parties with a vested interest in selling products through fee-based advisors.
