Fiduciary institute ads take stance against broker dealers

Consumer confusion and disinformation surrounding the differences between Broker Dealers and Registered Investment Advisors has peaked and customers are often misled about the conflicting roles and which are best suited to safeguard their investments, according to think tank and investor advocacy group, the Institute for the Fiduciary Standard.

That led the Institute last week to kick off a new advertising and message campaign aimed at publicizing the differences in the two functions with the hope of better protecting investors. And though they didn’t exactly say so, they declared war on broker dealers.

“A brokerage firm represents firms whose products they sell,” said Knut Rostad, the Institute’s president, in a press briefing. “A fiduciary represents clients whose best interest they serve. A brokerage firm lives off of conflicts, commissions and fees, while a fiduciary seeks to avoid them, always. And fervently.”

The differences are not always understood, Rostad said, and broker dealers sometimes intentionally confuse the issue, seemingly offering friendly investor advice while really pushing to meet a sales quota or commission.

Testimony, website messaging differ

“A study by the Consumer Federation of America from 2017 looked at what insurance companies and broker dealers are saying on their websites, as opposed to what they are saying in legal proceedings,” he said. “We see a rather startling difference on their websites where they hold themselves out as offering trusted advice, while at the same time, at virtually same time, they are arguing in courts that their reps are mere salespeople.”

This is not a new issue for the Institute, whose campaign plans include print ads, social media messaging, and other content distribution. Almost from the day it was founded in 2011, it has urged the Securities and Exchange Commission to raise the performance standards of broker dealers to a level similar to RIAs which require greater disclosure, how fees are paid, and how conflicts are resolved.

“Investors are not fools, but they are misled,” said Rostad. “And that is what we're seeing in the marketplace. Hopefully, the ads and language like this might be able to get a different conversation going about what is actually happening in the marketplace.”

George Kinder, financial planning author and founder of the Kinder Institute of Life Planning, who joined the press briefing, said his organization also plans to launch a movement to urge greater performance standards for corporations, governments, and non-profits.

“I think that we could solve most of the problems of the world with a one sentence, legislative proposal that basically makes them act in a humane way to all concerned,” he said.
“It says a fiduciary standard of obligation is required to place the interest of all stakeholders of truth, of humanity, democracy, and the living planet that sustains us.”

Advisor disillusioned with sales emphasis

Yesenia Realejo, wealth advisor with Tobias Financial Advisors, said she started her finance career at Merrill Lynch but became disillusioned with the emphasis on selling over client needs.

“I wasn't aware of the different service model and that I was going to work for a company whose primary function was sales,” she said. “But it did become very obvious that that's really what they were all about. So when I was ready to transition and become a financial advisor, I realized that I didn't want to be one at a broker dealer. I was interested in doing more than just fulfilling quotas to earn bonuses. The quota system is alive and well, and the financial compensation is tied to them directly. So that's not the way I wanted to operate.”

Another burgeoning issue, the participants said, is that broker dealer customers are often unaware how conflicts are resolved should misconduct allegations arise.

“Because of mandatory arbitration provisions, these cases have to be tried before a tribunal administered by FINRA, which is known euphemistically as a self-regulatory organization but is actually glorified trade association,” said Dan Solin, an attorney and president of Solin Strategic, a consultancy for investment advisors. “So, you'll have customers of brokers, deprived of their constitutional right to a jury trial, having to try cases before a tribunal appointed by an industry trade association. It's an absolutely shameful system that exists today. Insisting on mandatory arbitration, depriving your customers of their constitutional right to a jury trial, is itself a breach of fiduciary duty.”

Broker dealers' conflict of interest cited

Solin said the SEC’s Regulation B1, which deals with conflict-of-interest obligations for broker dealers, is complicated and wholly inadequate.

“Regulation B1 is 770 pages,” Solin said. “Why does it take 770 pages to say to brokers “do the right thing, act in the best interest of your clients?’ It doesn't adequately protect retail investors, the conflict-of-interest disclosure requirements are simply not effective.”

The Institute unveiled a series of print ads that will buttress its campaign. One was headlined “Only a fool chooses a sales pitch over trusted advice.”

“Brokerage firms hide the fact that their core business is sales,” the ad says. “Investment advisers, by law, must always give fiduciary trusted advice.”

 

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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