There has been an inordinate amount of discussion about applying the fiduciary standard for financial advisors to registered representatives who sell investment products for commission. The application of this standard is supposed to protect investors from representatives who put their need to produce income ahead of their clients’ need to achieve their financial goals.
Paladin asked members of its online Registry service what they thought about expanded fiduciary standards for representatives. For the record, 100% of the 224 members who provided responses are RIAs or IARs. Approximately 50% also hold active securities licenses.
Is there a need for a fiduciary standard?
92.7% answered “Yes” to this question. Higher ethical standards for hundreds of thousands of registered representatives could help restore some of the trust that used to exist between reps, advisors, and investors. This trust has eroded to an all time low.
Why have an expanded fiduciary standard?
76.5% of our members believe investors are very confused about the roles and compensation systems of advisors and representatives. Fiduciaries provide financial advice for fees. Reps use sales recommendations to sell investment products for commission. Our members agreed no investor knows the critical differences between financial advice and sales recommendations. Members said sales reps were very skilled at obscuring differences starting with the misleading sales claim that they were financial advisors. It is unfortunate that there is no regulation that prohibits this deceptive sales practice.
Will a fiduciary standard protect investors?
71.3% did not believe an ethical standard would protect investors from unethical advisors and firms. The pressure to make money is simply too great and very few investors know how to protect their own financial interests. Lack of knowledge makes investors vulnerable to slick sales pitches from advisors they believe are competent and trustworthy.
How will Wall Street broker/dealers respond to a fiduciary standard?
58.9% of our members believe the firms will use delaying tactics and create major loopholes in their service agreements. This tactic will be effective because very few investors read service agreements. There is no reason to read the service agreement of a representative they like and trust.
Will a fiduciary standard damage investors with smaller asset amounts?
94.4% thought this claim was a weak tactic that was designed to maintain the status quo. Commission representatives will still work with investors who have smaller asset amounts. The only difference is they will be held to a higher ethical standard for their recommendations. And, don’t forget the Robo advisors. They have very low minimums and they are held to the higher standard.
Why is Wall Street anti-fiduciary?
75.2% of our members agreed Wall Street has a core conflict of interest. It makes more money doing what is best for Wall Street than it does doing what is best for investors. A higher ethical standard will negatively impact Wall Street revenue and profitability. The standard will also increase Wall Street’s liability when representatives take advantage of clients who believe they are competent and ethical.
Who will enforce the fiduciary standard?
80.1% of our members believed FINRA is the only entity that could enforce the higher ethical standard for broker/dealers and their representatives. However, they believe FINRA’s relationship with Wall Street compromises its ability to provide the type of protection that investors’ deserve. A breach of fiduciary standards that ends-up in a FINRA arbitration is a travesty of justice.
Although there is an inherent need for some form of a fiduciary standard, the reality is it will never happen. Wall Street will shut it down, FINRA (who is paid by Wall Street) won’t push for it hard enough and the independent RIA’s can’t take on this battle by themselves.
Unfortunately, the solution will not be a Fiduciary Standard but the solution should instead focus on ensuring investors understand the difference between an advisor truly giving advice and a representative selling a product.
