05 April 2010
Whereupon we duly admit to having a major conflict of interest
The news has been filled with debates over financial services reform. We, and much of the advisory profession, believe that providers of advice, as opposed to a product salesperson, should be required to act in their client’s best interest (to be a fiduciary in legal parlance.) In what can only be described as unsurprising, the big investment brokerage houses and insurance companies have beaten that argument back.
That should bother you, but we will take it in stride here at Thompson Creek. While the American public deserves better, we think it is in our best interest that the industry keep on going down the path they have chosen, which is to only require of themselves that what they suggest you buy is not “unsuitable.”
Given our representatives inability to end the practice of salespeople masquerading as advisors we will give you some free advice. The next time you hear from a purveyor of financial advice, we suggest that you ask them to sign a pledge, and agree to it contractually, where they state:
- I will always put the client's best interest first — ahead of my own and that of my firm and its employees. As defined by federal law, I will act as a fiduciary.
- When selecting investments, I will act as the client's agent, seeking the best investments for you at favorable prices at all times.
- While neither I, nor anyone, can promise superior investment returns, I will provide impartial advice and act with skill, care, diligence and good judgment.
- I will provide full and fair disclosure of all-important facts, including my compensation from the providers of the products and services I offer, as well as all fees I pay to others on your behalf.
- I will fully disclose and fairly manage, in the client's favor, unavoidable conflicts.
That includes us. In fact, from now on, it will be part of our contract. Hmmmm….. Reading number 5 it seems we have to disclose a conflict of interest already. We find it amusing to point it out, but it is most definitely a conflict of interest for us to suggest you only do business with advisors who will legally bind themselves to put your interests first.
So, your advice was just an adjunct?
From Harold Evensky:
"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."
At least you should ask whether the advice was adjunct or not. Maybe that is all you need and you understand you are dealing with a broker (a salesman.) If you were under the impression you were getting advice that was not merely an adjunct, then please run for the exit. As Genelly says, a broker is a broker and an advisor is an advisor. They shouldn’t be confused. I just suspect he doesn’t want them confused in court. He is all in favor of his firms not pointing out to the consumer that they are different. There they want them to be confused.
Don’t blame the individual brokers themselves. Many want to not merely act as fiduciaries, but truly be fiduciaries. They are not allowed to do so.