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Tuesday, September 22, 2015

"Objective Advice" & "Always Putting Your Interests First" - Really?

A dual registrant firm, which also sells insurance, has a graphic on its home web page which reads in part: "Objective Advice."

On another of its web pages the firm states: "Our mission is to become your trusted advisor - one of the first people you call when things change in your life. Someone you would send your mother to for advice. We do this by ... always putting your interests first." [Emphasis added.]

The firm  also states that it is "a financial planning and investment management firm. Our CERTIFIED FINANCIAL PLANNER® practitioners utilize a comprehensive approach providing recommendations in areas from retirement planning for individuals and businesses to managing investment portfolios, and insurance and estate planning." [Emphasis added.] Hmmm ... I thought the CFP Board takes the position that if a CFP certificant just performs services in one area, such as "estate planning" (i.e., insurance), then the certificant not doing "financial planning" (in the CFP Board's definition of same). (Note: I don't agree with the CFP Board's position, in this regard; but that's another debate for another time.) Yet, the firm suggests that its advisors utilize a comprehensive approach. Does that mean that, given the firm's holding out of this comprehensive approach, that the accepts the CFP Board's fiduciary obligations attendant to same, at all times? Or is this representation, that comprehensive advice is provided, just a bait and switch? 

The fact that the firm also SELLS securities and SELLS insurance products appears to be de-emphasized on its web site.

The firm's ADV Part 2A states in part: "Advisors working with [NAME OF FIRM] are engaged in parts of the financial planning business other than giving investment advice.  They may also sell securities and insurance for sales commissions, or may provide college planning services, financial planning services, and retirement plan services for compensation. Those activities take up a substantial part of their workday. Although [FIRM NAME’S] employees may receive compensation for these other services, clients are under no obligation to act upon any insurance or planning recommendations made or to make any transactions based on these recommendations." [Emphasis added.]

There is no indication that any commissions received, from either sales of securities or sales of insurance, are credited against the advisory fees of its clients.

The firm also states in its Form ADV, Part 2A: "We may in certain instances recommend investment products that pay us or our representatives a commission instead of a fee, but do not do so in accounts that we manage on a discretionary basis. The receipt of commissions from these transactions of course may create an incentive to recommend that you purchase certain securities based on our interests rather than yours, which is a potential conflict of interest. However, all such commissions or sales charges are disclosed to you in advance of any investment, and you would be under no obligation to purchase such products.  Moreover, we believe that our recommendations are in the best interests of our clients and are consistent with our clients’ needs."

So, here are some questions I pose to this firm and its advisers ...
  • How can you truly keep the best interests of the client paramount, yet be free to recommend products which pay you (the firm) commission-based compensation?
  • Is the compensation reasonable (judged under fiduciary standards of reasonableness, not under FINRA's rules)?
  • Do you think clients really understand the disclosures you provide?
  • Do you think that clients even read the disclosures?
  • Do you think your clients are aware of the need to protect themselves, under the doctrine of caveat emptor, when you switch hats from a fiduciary relationship to an arms-length relationship?
  • Are you not aware of the compelling body of academic research that when trust is placed in the adviser, disclosures don't work - due to behavioral biases which consumers possess?
  • Are you also not aware that the economic incentives presented by, and the allure of, higher-fee products nearly always leads one to, consciously or unconsciously, begin to make decisions that are not in a client's best interests?
Quite frankly, I have no idea how ethical, or unethical, your firm might be. But, I suspect I know the answer, as one of the your advisers posted a negative comment recently on an article about the impact of the fiduciary standard.

I would hope that your firm truly gives "objective advice" and is "always putting your interests first," as your marketing materials suggest. I hope that, somehow, you manage to ensure that clients' best interests are truly kept paramount, always.

My view about fiduciary status is this ... if you are a fiduciary to a client, you are always a fiduciary to the client. Fiduciary status extends to the entirety of the relationship. You cannot remove your fiduciary hat. You cannot do this by disclosure or any other means (such as client waivers). You can only fulfill your obligation to truly be objective by adopting a philosophy of level, reasonable compensation; you must remove economic incentives which so many jurists (including those on the U.S. Supreme Court) have noted lead to poor outcomes. You must avoid material conflicts of interest, wherever possible.

In the rare instance where conflicts of interest remain, they must be proactively managed in order to keep the clients' best interests paramount at all times - through a process of affirmative disclosure of all facts (and ramifications of the conflict), informed consent, and even then the transaction must be substantively fair to the client. No client will ever provide informed consent to be harmed.

It's possible to just have an arms-length, sales relationship with a customer.

But, if you hold out as a trusted adviser, as various representations and titles used on the web site contribute to such a conclusion, then you should not engage in "bait and switch." You should not attract potential clients with the promise of "objective advice" while "acting in your best interests," but then enter into an arms-length, sales relationship instead of a fiduciary one. It seems to me that it is a fundamental truth that “to provide biased advice, with the aura of advice in the customer’s best interest, is fraud.” [Angel, James J. and McCabe, Douglas M., Ethical Standards for Stockbrokers: Fiduciary or Suitability? (September 30, 2010), at p.23.  Available at SSRN:]

There is a writ, nearly as old as recorded human history. A man cannot serve two masters.

Who do YOU really serve?

I know you might not like what I say. You may not agree with it. What I say may challenge your firm's business model, the profits of the firm, and ultimately the compensation of its "advisers." And yes, the DOL's fiduciary rule proposals might be threatening your gravy train.

Again, I really don't know how your firm actually practices. But one thing is for certain. Given all of the conflicts of interest present in your current business model, I won't be sending my mother your way.

P.S. - How did we get to this point in time? When did dual registration, and/or combining fiduciary services with insurance sales or security sales for the same client, become so commonplace? Why did the SEC, in late 2007, explicitly endorse such "hat switching" and "wearing of two hats" by its ill-informed temporary rule?

No man can wear two hats for the same client. And no man should be able to hold out as a "white-hatted trusted adviser" and then turn into a "black-hatted product pusher." Our securities laws and regulations should not sanction such blatant bait-and-switch tactics.

When the steering of our regulators has gone astray, and deception trumps truth, is it not our responsibility to speak up and seek to correct the course?

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