All-or-nothing in the fiduciary fight leaves mostly nothing
We featured the latest salvo in the fiduciary vs. suitability standard of care battle the other day. This time it was the fee-only side shooting a long letter to the Securities and Exchange Commission urging the agency to make a decision on whether to extend the fiduciary standard.
They are pushing for a “uniform” standard, basically that everybody who is kind of like a financial advisor be held to the fiduciary standard of care rather than suitability. “Holding your client’s interest above your own,” is the mantra. I’ve heard that from plenty of folks I respect and it sounds altruistic and good.
In fact, I’ve often said the fiduciary/fee-only direction seems to be a smart one for many advisors. Certainly, the trend among young advisors is not to go into the commission-based direction, particularly insurance. That’s obviously not good for insurance, because finance people tend not to sell insurance products, and it is ultimately not good for the American public.
Another unfortunate aspect is the us-vs.-them antagonism that’s attended this situation since perhaps forever. But in all the fighting, clients’ interest doesn’t seem to be held above all else. The Certified Financial Planner (CFP) Board ground out its chairman apparently because he had an extended relationship with an agency that can collect commissions, although it appears he didn’t himself collect commissions. In that case, he was supposed to say he was compensated by fees and commissions.
It makes sense to look askance at someone charging a fee and collecting commissions based on the advice (although, again, that didn’t appear to be the case with the former CFP Board chairman). It follows that it would be simpler and more equitable to remove that conflict of interest and be a true advisor for the client.
But the fiduciary standard does not guarantee that. The SEC managed to issue $3.4 billion in penalties last year for wrongdoing against 686 cases, even though the agency says its enforcement efforts are underfunded.
The individual advisor is going to guarantee the best care for a client, regardless of the standard. Slimy people will slither through any net.
What if everyone becomes a fee-only advisor? Can all Americans afford to pay a fee? How many struggling families can afford a flat fee of $1,500 or whatever? Can some even afford $150 for an hour of advice? Many can’t afford that and whatever product is offered.
The result of the fiduciary standard, fee-only model applied to all advisors is that only people who can afford advice will get it. Everybody else will be steered directly to companies or low-cost online brokers or most likely won’t invest in anything or buy any insurance. Wages have stagnated for average Americans and they can’t depend on pensions. They will fall further behind.
If this is an all-or-nothing fight, much of America will end up with nothing.