| 04 March 2010
Harold Evensky is busy fighting the good fight for those of us who believe it should be a legal duty for those who provide investment advice to put the clkients interest first. Or, to put it in other words, to act as fiduciaries:
Some of you may know, Congress is in the midst of debating revision of the 70+ year old laws governing the standards applicable to anyone providing investment advice and I’ve been active with a group of friends actively encouraging Congress to apply fiduciary standard to anyone providing investment advice. That’s not a real popular idea with some brokerage and insurance representatives. Some of their objections seem pretty incredible to me. For example:
Bruce Maisel, Vice President and Managing Counsel of Thrivent Financial for Lutherans testified on behalf of the American Council of Life Insurers in commenting on the proposed application of a fiduciary standard to anyone providing investment advice. “We strongly oppose any requirement of acting without regard to the financial interest of the broker or investment adviser”, he said. “That could chill the ability of brokers or advisers to provide advice”. He either does not understand the concept of fiduciary duty or, scary thought, could care less about the interest of the client. Imagine! Meeting the fiduciary standard of placing the client’s interest first could kill commerce. I guess in his insurance and brokerage world Caveat Emptor reigns supreme.
And, in an Investment News, David A Genelly, an attorney representing brokerage firms said, “Extending the investment adviser’s full-blown fiduciary duty to brokers acting in non discretionary accounts – i.e. merely those who “recommend” purchases – is fraught with so much potential mischief that it undoubtedly has the plaintiff’s securities bar rubbing their already sweaty palm together with glee over prospects. A broker is a broker, and an adviser is an adviser. If brokers are now going to have the same fiduciary duties that advisers have, simply because they render some adjunct investment advice when we make recommendations, there is no telling where the liability will stop [my emphasis].” I guess if you ever receive “adjunct” investment advice you’d better take it with a grain of salt, or, better yet, maybe you should run for the exit.
The good news is, Congress seems to recognize the importance of linking investment advice to a fiduciary standard and I’m optimistic that in a month or so the financial services worlds will enter a new era of fiduciary responsibility. If you’re interested in learning more about this issue, check out the Committee for the Fiduciary Standard web site at: http://www.thefiduciarystandard.org.
I should be make this clear. I have no problem with brokerage. The sale and provision of financial products is a necessary part of serving clients, and we use brokers on our clients behalf. The distinction is on the matter of advice. Most brokers do not make sure that clients understand that they are representing an organization which does not require that they put the clients interests first, and that their job is to sell their companies products. As Bruce states above, they oppose the idea that they should have to act without regard to the interests of the broker or advisor. They believe their own interests should be first.
Many brokers of course do attempt to put their clients interests first, but they and/or their firm don't want the legal liability of being required to do so.
Our own position is simple. If you are selling a product, that is what you are doing, and should make it clear to the client that that is what you are doing. Nobody expects the car salesman to be doing anything other than trying to get you to buy their car. Buying products from a broker should carry the same clear expectations. The broker should not be allowed to claim the mantle in the clients eye that they are required to put your interests first. If the broker wishes to claim to be giving advice and not selling you something, then they should have to be held legally responsible for putting the clients interests first. It is that simple.