Wednesday, April 8, 2015

Fiduciary Standard - The Big Fight

I've written about this topic online a number of times, but I feel like the subject to non-industry people (and even some industry people) is a bit nebulous.   The issue at hand isn't whether or not the retirement plan industry, or the individuals making up the financial services industry are against the idea of a standard of care which puts the individual clients interest first.  In fact, arguably, just about everyone whom I've encountered in my career operates with the idea that putting the clients interests and needs is the primary/exclusive consideration when making recommendations or making decisions on behalf of clients.

The issue at hand isn't one of altruism vs. evil, rather it is one of practicality of implementation.  Simply put, the delivery systems in place that allows financial services to be delivered has primarily been built as a commission for service (sales) foundation.  Combine this payment system with the idea that giving advice which then generates a commission is a conflict of interest and what you have is 'conflicted advice'.  Under most regulations, whether it be ERISA or SEC rules, or the IRC all have conflicted advice in the category of prohibited.

It is in this area that the fight for/against the fiduciary standard lives, not whether or not actually providing advice in the best interest of clients is the right thing to do or not.  We all know it is.  Over the years, many practitioners; more and more every day are switching to a fee for service model.  This business model disconnects the revenue payment to the practitioner from the advice they are giving and eliminates the conflict of interest......theoretically.

However, I have seen registered reps (brokers, financial consultants, etc.) give very sound advice, frankly sole interest of the client type advice which would be a prohibited transaction should a fiduciary standard be applied ---AND--- I've witnessed so-called fiduciary, fee-only practitioners, significantly overcharge (because they can) for mediocre, and sometimes poor advice. 

What I'm positing is that the practitioner who operates in one model or another can be great, okay, mediocre or poor and the environment that they operate in shouldn't matter, but the legislation that gets drafted to deal with the practical issues shouldn't penalize any of the great practitioners from continuing to provide great financial services.  Unfortunately, from what I've seen from the DOL and the SEC on this so far, final rules not yet published, it appears that barriers are being built rather than roads.

In short, all clients are owed a fiduciary standard of care and as practitioners we should all operate that way.  Legislating a one-way system is not the answer, however, both models, the fee-only and the commission-based should have a valid way to operate so that it isn't a practical issue anymore.

- Jason Grantz

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