Client Beware? Harold Evensky’s Definition of Fiduciary
Posted by Bob Clark in UncategorizedIn his response to my January 8 blog, Jay Martin raises an interesting issue about whether a fiduciary standard can or should be applied to securities sales. He writes: “I, for one, am thoroughly confused how sales can or should be fiduciary.”
The implication here is that it shouldn’t be, and I couldn’t agree more. But then he goes on to imply that the standard of “caveat emptor” is sufficient to protect financial consumers in sales situations, and that’s where I have to respectfully disagree.
“Buyer beware” works great in situations where the consumer is an equal party to the transaction and—and this is the important part—understands the nature of the relationship: that the salesperson is trying to sell a car, a cell phone, a putter, an upgrade to a suite, etc. However, when it comes to securities “sales” we all know that’s not the case (whether we admit it or not).
In my own recurring straw poll of asking people over the years, including “sophisticated” investors, lawyers, business executives, high-net-worth folks, and so on, if they think their broker has a fiduciary duty to put their interests first, not one has ever answered “No, they don’t.”
That’s no accident. Since I started covering advisors, Wall Street has spent billions of advertising dollars suggesting, implying, or inferring that what you get from brokers is investment advice. Over those same years, in response to various regulatory initiatives or proposals, the industry has as much as admitted that if they had to fully disclosure the nature of the sales relationship, it would affect sales.
That should be our first clue that something’s amiss. For caveat emptor to work in a consumer securities transaction, the consumer should be made aware that “their” broker neither works for them nor has any duty to act in their best interest. But when brokers, or other “financial advisors,” cross over the sales line into giving advice, that’s when a fiduciary duty should apply to the relationship.
What constitutes advice? Financial planning industry leader Harold Evensky recently defined it the clearest, simplest, most elegant way that I’ve ever heard, using what Harold calls the “you” standard: When a broker or any other kind of “advisor” tells a client “here’s what you should do:” buy a mutual fund, sell a stock, hedge a position, etc., that’s advice. If you simply give them product information, that’s sales.
“But if we do that,” I hear brokers and insurance agents across the country crying, “no one will buy anything.” Maybe that’s our second red flag.
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I have always felt that sales can be ethical. A client should never be sold something in appropriate. However, there are sometimes when an appropriate product is only available as a transaction (annuities come to mind, and they are appropriate sometimes). I charge fees where appropriate and sell product where appropriate. The majority of the large Ponzi schemes that I have seen have involved fee-based work. So, it comes back to ethics. By the way, I am independent because I do believe that it is very hard to work my way and work for one of the big broker-dealers.
Edward,
The dilemma of arranging for a client to invest in an insurance or annuity product without a commission is one that has been created by the insurance industry and by state regulatory requirements. By the industry in the sense that no-load, no commission annuity products are few and far between. State regulatory requirements fail consumers on this point because most states do not permit licensed agents to rebate commissions to the client. The whole model needs to change to enable consumers to purchase such products directly from insurers without load when they are self-directing, and to permit commission rebates when the contract is facilitated by a fee-only advisor who is licensed as an insurance agent. Even better, states should permit the insurer to have an annuity option with no commissions so that the advisor can use that version of the annuity contract, because rebating could be deemed income to the client rather than a cost reduction of the contract.
Jan Sackley, CFE
Fiduciary Foresight, LLC
Risk and Regulatory Compliance Consultants
269-323-8119
jan@fiduciaryforesight.com
Twitter@jansackley
Jan
I would think that consumers would be worse off in a world where rebating was allowed. They could be sold inferior policies simply by an agent offerring larger rebates. Cost then becomes the consideration.
There are a number of no load annuities available through Vanguard, Schwab, Fidelity, Rowe Price and Jefferson I believe as well. However the consumer is not going to read the documentation and many fee only planners are so anti annuity that they fail to consider them.
Your suggestion about having two versions of most contracts may make sense but I say that without having any idea it may cost to prepare documentation.
Possibly states should either require planners to have insurance licenses without being affiliated with any company or enforce the current requirements for giving advice. That begs the question if you give insurance advice when you are not licensed have you broken the law or have you broken the law only when you are caught?