By Cyril Tuohy
Financial advisors in the vast majority of cases strive to deliver a fiduciary standard of care to clients, and the shift toward independent advisories is a manifestation of that desire, said Sheryl Garrett, president of the Garrett Planning Network.
Advisors leaving large wirehouses to form their own companies or to join small regional wealth management companies, want to uphold their belief in doing what’s best for their client and living by the fiduciary standard.
“Nearly every financial advisor or financial planner I’ve spoken with or come into contact with believes that they put their client’s best interest first, and they are willing to embrace this requirement, even if they don’t officially have that requirement now,” Garrett said.
Garrett spoke on a conference call earlier this month in one of the seminars organized for “Fiduciary September” by the Institute for the Fiduciary Standard, a nonprofit organization that advocates for rules requiring financial advisors, wealth managers and securities brokers to exercise a fiduciary standard of care toward clients.
Garrett, head of a nationwide network of independent, fee-only financial planners, said the industry was undergoing an evolution whereby the companies that employ financial advisors “have to start providing more flexibility so that the advisors can do what they inherently want to do, and that is act in the client's best interest.”
Garrett, whose network targets middle-income individuals and families, said that as companies become more independent, the different financial representatives and advisors operating within those networks will be “able to provide the kind of advice that would meet the fiduciary standard.”
Remaining companies with captive agents or representatives with limited product selection will either evolve in terms of their flexibility or go out of business, she said.
Financial and investment advisors registered with the Securities and Exchange Commission or their state and regulated under the Investment Advisers Act of 1940 are duty-bound to exercise a fiduciary standard of care. The fiduciary standard requires that the interest of the client comes first.
Registered representatives of broker/dealers, who also dispense financial and investment planning advice to clients but are not regulated by the Advisers Act, are required to meet only a suitability standard of care.
The suitability standard is seen as a lower standard and registered reps are not duty-bound to put a client’s interest before their own. Consumer advocates and backers of the fiduciary standard have criticized the brokerage community for resisting the higher standard of care.
Brokers and some financial advisor groups say the fiduciary standard is unnecessary. They content that it would raise the cost of doing business and force advisors to drop clients who would not be able to afford the more expensive advice that comes with meeting the higher standard of care.
Dispensing financial advice that meets a suitability standard at a lower price that middle-income investors can afford is better than no advice at all, according to advocates of the suitability standard.
SEC regulators are reviewing whether to develop rules around a single fiduciary standard that would apply to anyone entrusted with managing a client’s wealth.
The U.S. Department of Labor is studying the implementation of a separate rule that would also require retirement plan advisors to meet a fiduciary standard when advising retirement plans regulated under the Employee Retirement Income Security Act.
Mary A. Malgoire, founder of The Family Firm, a fee-only financial planning firm headquartered in Bethesda, Md., said that while SEC regulators are pondering whether to go ahead with rulemaking, the industry needs to address the often unwritten “character standards” that emanate from advisors who strive to deliver a fiduciary level of care.
“Bottom line, I think, is that we need to create a fish tank in the industry that everybody wants to swim in, and then hold that up to the community of investors and say, ‘This is where you get the advice that is truly in your best interest,’” Malgoire said.
Advisors looking to meet character standards should steer away from giving conflicted advice, Malgoire said, and should be “transparent about compensation costs.”
“There are two different numbers: What is the advisor paid, and the fees associated with the investment over time,” Malgoire said. “Both of those numbers reduce the result to the investor ultimately, so have a requirement that these numbers be published as estimates and provided as actual.”
Malgoire called on advisors to speak to investors in layman’s terms. For too long, she said, the industry has found it convenient to hide behind a barrage of jargon, and all that has done is obfuscate investors’ grasp of what advisors are doing with other people’s money.
SEC regulators have started to require plain language in the communication with investors, which is helpful, “but this stuff cannot be in the kind of disclosures that have appeared and gone before us,” Malgoire said. “They are too complicated.”
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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