Yes, A Fiduciary Standard Will Result In Higher Costs To Consumers, But There Are Solutions To That Challenge

Monday, January 23, 2012 17:51
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Yes, A Fiduciary Standard Will Result In Higher Costs To Consumers, But There Are Solutions To That Challenge

Tags: fiduciaries

In recent weeks, both the SEC and DOL succumbed to pressure to delay the release of proposed fiduciary standards. There are two prevailing arguments being made by those who are seeking the delays: (1) that a fiduciary standard will increase the cost of providing investment advice, making it more difficult for smaller investors to access competent advice; and, (2) it will reduce choice, limit the availability of certain products and services.

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NAIFA, in a recent press release, essentially reiterated the cost argument.
 
My response: NAIFA is right. A fiduciary standard will result in higher costs and that's a fact.
 
The decision-making framework of a fiduciary standard, including the ongoing duty to periodically monitor the client's investment strategy, requires more of an advisor's time than a traditional engagement subject to a suitability standard. I'm not going to assign a quantitative judgment to my answer, but simply acknowledge that "time is money."
 
The SEC does not need an extensive study to come to this same conclusion, and we can concede this point without serious degradation to the fiduciary movement.
 
Since the Dodd-Frank study was released a year ago, I have taken the position that we should not attempt to paint every broker with the fiduciary brush. Nor should we require every client to pay for fiduciary services when they may not need it.
 
If all a client wants is to trade a couple shares of stock or ladder a bond portfolio, the engagement should not have to be subjected to a fiduciary standard, unless a client so directs.
 
There is a simple solution: require a fiduciary standard any time a client is provided, or requests, "comprehensive and continuous investment advice.”
 
On the DOL side, I have a different response (the NIAFA press release didn't mention the DOL initiatives).
 
I do believe that all retirement assets should be subject to a fiduciary standard of care, whether those assets are in qualified plan, public plan, 403b, or IRA. The mismanagement of retirement assets and the inability of the average worker to retire in dignity (concept credited to Brooks Hamilton), will have a significant negative impact on society and the fiscal health of the nation.
 
There is no reason why computer-based models or QDIAs couldn't be used to manage smaller accounts. Such solutions are even more cost effective than the services of an advisor, plus the computer-based models and QDIAs can easily be subjected to fiduciary audits.  

 

Comments (11)

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jalfonso
Sales people, in recognition of the fact that they are held to a lower standard of care, should not be allowed to call themselves by a title that implies they are paid to give advice, such as "wealth adviser", "financial consultant", etc.

I disagree that fee-only results in a higher cost to the client. It is true that clients will have to write a check to their adviser for their service but this is much more transparent than the insidious system of hidden fees that are built into the products foisted upon clients by product salespeople. When you factor in the higher expense ratio, surrender charges, 12b-1, fees, etc. and their impact on long term growth of wealth, fee-only is the better value.
jalfonso , January 23, 2012
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vguettlein
Fee-only does not result in higher costs; but higher fiduciary compliance costs inevitably will. There is no such thing as a free lunch. The question is, whether the higher costs of being a fiduciary drive people back into the arms of the people we are trying to rescue them from, or make it where we can't afford to help the middle class. I believe Michael Kitces, and perhaps Andy, and others have said that we will not be a legitimate profession until we help the middle class, or something to that effect. Law of unintended consequences?
vguettlein , January 24, 2012
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williamp707
Cost will increase, but many entrepreneurial advisors have already developed fiduciary business models that serve the needs of the middle class profitably.

From my perspective the fee-only vs. commission argument does not move the discussion forward. It is possible that both forms of compensation can work. The key point in the fiduciary discussion is whether the "advisor" is working in the clients best interest first and foremost.

One "simple" solution could require that all advisors be held to the standard at the point of making the recommendation and/or moving forward with implementation. The product manufacturers could manufacture all they want. However, the advisors would be required to know the details and inner workings of every product they recommend and should be required to explain why they chose one product over another.
williamp707 , January 24, 2012
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vguettlein
Forget fee-only versus commission; I happen to agree with you, William. My comment was directed to Don's comment that a fiduciary standard WILL increase costs to the consumer. We pass those costs along. Does this cost deter people who should be dealing with a quality, professional advisor from using an advisor? Does that send them back to the "free" advisor who is not serving their best interest? Does it leave them to determine which bit of advice they find on the internet is valid, versus the information that doesn't apply, or worse, is wrong for them? Does the regulatory effort to help the little guy have the unintended consequence of harming the little guy? Don thinks everyone's retirement balances should be covered by a fiduciary obligation, but can or will those individuals be willing to pay the extra fees in a world where fees are considered evil?
vguettlein , January 24, 2012
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dtrone
Think skeet. The groups putting up a strong résistance to a fiduciary standard know how to shoot. They have their clay pigeons launched one at a time, and they all shoot at the same pigeon, at the same time - they're very pretty effective in making sure they get a hit. The fiduciary side; different story. Someone shouts - "fiduciary" - and guns start a blazing in every direction, and we end up hitting nothing. We need to learn to track one target at a time, with each person taking their best shot. In this blog, the target is the question: "Does it cost more to take a client through a fiduciary engagement than through a product sale subject to a suitability standard?"
dtrone , January 25, 2012
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brentb843
Hold on! Is the arguement the cost to the client or the firm? Who cares if it costs a broker more to provide a better standard of care?

Also, fee versus commission is irrelevant. Fiduciaries need an auditable decision making process that can pass peer review. Either you have that or you don't, regardless of what you charge.

That being said, it makes it tough for commissions to stand up to scrutiny because a third party, not the client is compensating you.
brentb843 , January 25, 2012
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brentb843
More critically why I think the GFS is another silly designation. Throne is in the business of selling memberships, like the FPA.

Right now we have hoards of advisors who are Accredited Investment Fiduciaries, but not fiduciaries. Tomorrow we will have non fiduciary Global Fiduciary Strategists.

Its not a title, its a process!

brentb843 , January 25, 2012
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vguettlein
Brent, for those of us that charge a 1% AUM fee, or less, if you increase our cost of doing business, then we must either pass the cost along, or eliminate clients that are now too expensive to help because the leftover fees aren't enough. So, I think a statement like "who cares" is a bit flippant. Cost matters in EVERY business. If we can't make a reasonable profit, then we don't stay in business. If we raise the cost of fiduciary advice, as Don states it we must, so much that the average guy on the street says ,"Who are you kidding? That fee is outrageous!", just like with the index fund vs active fund debate, then who will look out for their best interests? Don, you say not everyone needs a fiduciary, so are you saying that some people SHOULD be doing business with people who think of themselves first? Also, if the cost of being a fiduciary in a low-fee world means that nobody is willing to serve an investor with less than $x, then are we just throwing them to the wolves? There is no such thing as a free lunch. If your mother can't afford a fiduciary, then are you willing to see her slammed by a greasy salesmeister? I don't think so.
vguettlein , January 25, 2012
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agluck
Brent: Coming at people with a knife between your teeth isn't helpful. Don Trone almost singlehandedly began the fiduciary movement for RIAs. I witnessed that. He's demonstrated that he understands issues surrounding the fiduciary movement better than anyone.

Defining which kinds of advisors can act as a fiduciary is important and needs to be aired in professional forums like A4A. Promoting that discussion is what this site is about. But let's all please contribute to the discussion in a constructive way rather than attacking.
agluck , January 26, 2012
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brentb843
I'm just stating the obvious. A fiduciary process or standard is not a designation. Continuing to allow those who will no be able to provide such is an attempt to confuse investors.

Vguttlein - explain how costs will increase...I'm not seeing it. The arguement by those who do not want to be held to an auditable standard that it will cost us more is a no-brainer, so why should I have to carry the cost (and liability) yet they do not? Your argument is not based on the facts of real costs.

Not everyone should be a fiduciary. We need brokers to execute trades.

Andy - you can't continue to fault the FPA and give Trone a pass - he's got the same model. He is selling designations. Like or not, that now takes him out of the equation.
brentb843 , January 27, 2012
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brentb843
We all need to look at the CPA, not internally as a giude for professionalism. We all can agree the a CPA is the most widely recognized designation when it comes to financial decisions of individuals. The group does not allow you to obtain the designation and then not work in the best interest of the client or follow GAAP. The CPA mark allows an individual to know that the CPA has the requisite knowledge, experience and will adhere to a standard of care when working with the client. A CPA would never be allowed to fill out a tax form and not be held liable for the information contained there in.

Could you imagine when you get audited, calling your CPA to be told 'yes,I am a CPA, but I do not file taxes as one. Its just a designation to make you do business with me. Did you not read the fine print?'
brentb843 , January 27, 2012

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