Morningstar.com (March 28, 2015 8:36 am) — They say that if something looks, acts and quacks like a duck, it must be a duck.
But what if you take a bite of it and it tastes like chicken?
That’s the conundrum facing the financial-services world right now as the big brokerage houses try to convince the public through advertisements and actions that they are fiduciaries — putting consumers’ best interests first — right up until there is a dispute or a problem, at which point they no longer want the burden of making customers the first priority.
A report released this week by the Public Investors Arbitration Bar Association cited nine big brokerage houses for advertising as if they’re fiduciaries, but denying that standard and renouncing any requirement to avoid conflicted advice in private arbitration hearings.
The PIABA report agreed with conclusions from the Council of Economic Advisers, which said in a February study that investors lose up to $17 billion a year on their independent retirement accounts due to their advisers’ conflicts of interests. PIABA noted those total losses represent nearly $80 billion since the Dodd-Frank Act instructed the U.S. Securities and Exchange Commission (SEC) to study imposing a fiduciary standard rule on brokers to ban conflicted advice.
The timing of PIABA’s report is no coincidence; the SEC and the U.S. Department of Labor both appear poised to act on rules requiring a fiduciary standard.
The PIABA report cited ad pitches from nine leading brokerage firms — Merrill Lynch BAC, +0.51% , Fidelity Investments, Ameriprise AMP, +1.76% , Wells Fargo WFC, +0.50% , Morgan Stanley MS, +0.83% , Allstate Financial, UBS UBS, +0.08% , Berthel Fisher, and Charles Schwab SCHW, +0.78% – noting that statements like “It’s time for a financial strategy that puts your needs and priorities front and center” (from a Merrill ad) are at odds with how the firms work when investors file arbitration cases after suffering losses from conflicted advice.
Five of the firms — Ameriprise, Merrill Lynch, Fidelity, Wells Fargo, and Charles Schwab — have publicly stated that they support a fiduciary standard.
That disconnect between what is said and done in the financial-services business is the heart of the matter, but also the reason why this problem has lingered and won’t likely be solved by either the SEC or Labor Department any time soon.
The current rules state that anyone selling advice and counsel — someone whose focus is on the financial planning rather than on selling products — must live up to a fiduciary standard, meaning that they put the client’s best interest first.
Anyone selling products to investors lives by, instead, a suitability standard, meaning that what they sell must simply be suitable for the buyer.
The question is whether the client understands the difference upfront, where the advertising blurs the line. If you think someone has or must have your best interests at heart — despite the fine print on account agreement papers — you may let your guard down.
“There’s a hypocrisy here, when someone displays one face in public through their statements and advertising, but then they show another face in private,” said Joe Peiffer, PIABA’s president and one of the authors of the report. “There’s no sunlight there [in arbitration cases], and I think people and companies show who they really are and what they’re really like when no one can watch them.”
Peiffer was quick to point out that the report is not bashing brokers, noting that the vast majority of them will never do anything that results in an arbitration case.
“There are lots and lots of good brokers who will do the right thing, and not because they have to but because they want to.” Peiffer said. “That’s not necessarily true for their employers — the brokerage houses — judging from what they have said versus what they have done.”
The problem has been growing for years as big brokerage firms wanted a slice of the growing financial planning market without the burden of living up to its higher standard for conduct. They walked fine lines in regulations, all while the public grew more confused over what it was getting and paying for when working with brokers, planners, wealth counselors and any other title that could be applied to stock jockeys and portfolio preparers.
Dodd-Frank was supposed to force the industry’s hand, but it has been nearly five years with no substantive movement, though the SEC and Labor Department are supposedly closing in on their proposals. President Obama suggested a fiduciary standard be applied to anyone who works with retirement assets, such as moneys in a 401(k) plan.
Brokerage houses that work under a suitability standard have been fighting change because it would force them to alter business practices. They argue, loudly, that forcing all advisers to be fiduciaries would leave small investors out in the cold, unable to get quality advice because their accounts could not generate sufficient revenues to attract good advisers.
That’s poppycock. Small investors right now are often left to the least experienced guys in the office; those newbies are still going to have to start somewhere, and earning something on a small customer is better than earning nothing from a big one.
The plain truth is that it’s one heck of a lot easier to give investors — but especially the small fry of the financial world — advice that is “suitable,” perfectly appropriate but not necessarily with the client’s very best interest at heart.
Until the confusion is over, there will always be someone on the losing end of this debate, and it will be a consumer.
Said Peiffer: “Investors deserve better. Let’s hope we get some clarity in these proposals [from the SEC and DOL], and that we can eliminate the confusion, because I don’t think there’s anything worse for an investor than finding out that the person you trusted didn’t have your best interests at heart after all.”