By Cyril Tuohy
A uniform fiduciary standard on broker-dealers and financial advisors would hike the cost of doing business and trim the number of choices for retail investors, according to a new survey of financial advisors.
Results of the survey, conducted by the National Association of Insurance and Financial Advisors (NAIFA) and the American College of Financial Services, reinforces findings of surveys conducted over the past several years by insurance research and independent organizations.
Gary Sanders, NAIFA senior vice president of securities and state government affairs, said the latest results strengthen NAIFA’s position before the Securities and Exchange Commission (SEC). “Our concern is that whatever the regulators do, that it does not harm the people we’re trying to protect, which is the middle market,” Sanders said in an interview with InsuranceNewsNet.
NAIFA, which represents 200,000 fee-only and commission-based advisors and their associates, is one of several organizations that opposed a uniform fiduciary standard on financial advisors.
The SEC, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in the wake of the 2008 financial crisis, is reviewing whether to impose a uniform fiduciary standard of duty on broker-dealers and financial advisors. Draft rules are expected to be published later this year or early next year.
Backers of uniform standards say retail investors deserve and should expect their financial advisor to deliver the highest fiduciary standard the industry can offer. Only by meeting a fiduciary standard can advisors properly represent their clients, and be free of the conflicts of interest that have been blamed for commission-based advisors steering investment products that are more lucrative for advisors to sell, but not necessarily in the best interests for investors to buy.
Opponents of uniform fiduciary standards say not all retail investors want or even need the expensive advice proffered by advisors who meet fiduciary standards. Many middle-market investors, mindful of tighter wallets, are perfectly happy with advisors who meet the lower “suitability standard” threshold, advisors who also come at a much lower price. Investors with access to advice merely deemed suitable are better off than if they had no advice at all, opponents of uniform fiduciary standards say.
Either way, the survey results will help the SEC make a more informed decision, Larry Barton, president and chief executive officer of The American College of Financial Services, said.
“We believe more information of this type will help the SEC make better regulatory decisions,” he said, in a release. “This issue is challenging and highly charged, but in the end, all of us want a solution that is in the true best interest of retail investors.”
If the SEC were to implement a uniform fiduciary standard, 35.4 percent of the survey respondents said it would mean more limited products to sell to customers, 39.4 percent said it would mean price increases and 45.7 percent said they would shift to higher-income clients.
Faced with a 15 percent increase in the cost of doing business, 44 percent of advisors said they would increase fees on clients, and 48 percent said they would limit their practice to clients with a minimum amount of assets, the survey found.
The bulk of clients represented by financial advisors belonging to NAIFA have between $50,000 and $249,999 in their investment portfolios, and NAIFA has long argued that these retail investors need value-based advice.
Sanders said that the business model of advisors is based on the long-term relationships with clients through one, two, three and sometimes even four generations, not so much on details surrounding transaction fees.
Advisors, whether fee-based or commission-based, will do well if they do right by their clients. “If they are not keeping clients, they will not get referrals and not do well,” he said.
Indeed, 81.3 percent of respondents said that the most common selection factor used by retail investors in choosing an advisor was experience and reputation, the survey found. That was followed by the standard of care under which the advisors operate (46.5 percent) and the perceived objectivity of the advice (41.6 percent).
The cost of the advice wasn’t nearly as important a deciding factor compared to reputation and word of mouth. Only 14.8 percent of respondents pointed to the cost of advice as the most common selection factor in making their decision, the survey found. Only 9.5 percent of respondents indicated that retail clients said compensation methods were the most common selection factor in making a decision about a financial advisor.
The survey, for the first time, queried advisors about non-cash compensation. More than 43 percent of the respondents said training provided by non-cash compensation helped them “better serve my clients,” and more than 30 percent said non-cash compensation “makes me more likely and/or willing to participate in training,” the survey found.
More than 44 percent said they had not received non-cash compensation.
A total of 2,419 financial advisors participated in the nationwide survey conducted May 20-29.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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