March 15, 2013
Dear SEC,
I reviewed the 72-page position paper about Duties of Brokers, Dealers, and Investment Advisers. Here are my comments. I was a stock broker for 21 years until I resigned in 2010. I remain a life and annuity insurance agent and am licensed in 12 states. I resigned in 2010 as a stock broker since I had been specializing in doing fixed index annuities with Baby Boomers and seniors since 2004. Not one of my 300 plus fixed index annuity clients has ever lost a penny. That was not the case with clients for whom I had earlier worked with for mutual funds, varialbe life insurance, and variable annuites.
Whenever I contact a prospect, one of the first things I say to them is "There are no fees for my services; however, I do earn commissions from life insurance companies when I help clients start fixed index annuities." That is clear enough, I feel. Your position paper keeps talking about investor confusion and the need to "harmonize" duties between brokers and investment advisors. That whole concept is very flawed. I feel that trying to harmonize duties of brokers and investment advisers is akin to saying you want to harmonize the duties of baseball players and football players.
Brokers, as well as insurance agents, have always tried to gather enough information from a prospective client to determine their most immediate objectives, and then the broker or insurance agent makes a specific recommendation of which securities or insurance products to recommend. The broker or insurance agent implements the particular securities or insurance product and earns a commission. In 25 years I have never charged a fee. It certainly makes sense to recommend the best products and stand by to monitor them with clients. Over the years referral and repeat business has accounted for a large part of my commission income. Also, as things change in a client's life, the current specific financial objectives can be updated and addressed in this same manner.
None of this is what a true Investment Adviser should be doing. A true Investment Adviser should always be OBJECTIVE. They should collect a fee for financial planning. I have always felt that that profession had a built-in conflict of interest whenever they tried to implement recommendations they had made, and especially if they then earned a commission. It is a common saying that every client would like a Financial Adviser, but that maybe only 5% or 10% want or can afford to pay a fee. I say to my clients that "I am NOT OBJECTIVE. I am SUBJECTIVE. Once I have a good grasp of what a prospective client's specific objective is, I will always try to simply recommend and implement the best insurance product to achieve that objective. In this regard, I am completely SUBJECTIVE.
You have used the term "episodic" to describe the fulfillment by Brokers and Insurance Agents of their client's specific current financial objectives with particular securities or insurance products. Your rule making should follow that direction. Brokers and Insurance Agents should never say that they are doing a complete financial plan for a client, and they should never be considered a "fiduciary" if they state at the outset the limited role they intend to play. One the other hand, if an Investment Adviser periodically does a new financial plan and makes detailed global recommendations, he is inviting a fiduciary relationship with the client. Also, by charging a fee akin to a Lawyer's fee, he has intentionally created a fiduciary relationship.
As you go along, please be very suspicious of all asset based fees. I don't view these types of fees in the same way that I view a fee charged by a Financial Adviser to do financial planning. Asset based fees are much closer, in my mind, to commissions than fees for just financial planning. I think the lawyer analogy holds here as well. To do a simple legal document, should a lawyer charge much higher legal fees for the same document to a wealthy person than the lawyer charges another person who is not wealthy? Maybe Financial Advisers should only be allowed to earn fees based upon some sort of hourly or work product criteria. The fiduciary propriety of that arrangement is much clearer, I feel, than any additional income earned by commission or asset-based fees.
Lastly, the economic justification for assigning an arbitrary "fiduciary" responsibility to Brokers (and Insurance Agents somewhere down the line) will simply make it not feasible for Brokers to work with small non-qualified and qualifed accounts (Message to the DOL!). That's one reason that Investment Advisors already eschew working with low net worth individuals. I have always been willing to do my best with any clients no matter what their means to do health insurance, life insurance, IRAs, annuiites, and other financial products just so long as the products are right for the clients. I have been rewarded commensurately by earning commissions over a 25 year period. In all that time I have never had a claim or grievance filed against me. I have never tried to be or wanted to be a "fiduciary," but I have felt that I have done a very good job of meeting my clients' specific financial objectives over many years.
In conclusion, it is your rule making responsibility to NOT CONFUSE THE DICHOTOMY OF THE BROKER (OR INSURANCE AGENT) AND THE FINANCIAL ADVISOR FURTHER. Please clearly delineate that Brokers should advise that they make specific recommendations for particular financial PRODUCTS and earn a commission to do so. Brokers must advise every client that they have a duty to make the best financial product recommendation they know of for that particular situation. At a minimum they should clearly state that their duty is to make suitable product recommendations, and are capable of faithfully implementing that financial product for the client. Brokers should be able to make it clear to clients that the SEC says that Brokers are NOT ACTING IN A FIDUCIARY CAPACITY. Conversely, every person who earns a fee for financial planning should clearly state that by doing so that the SEC says they have created a FIDUCIARY ARRANGEMENT with that client/. I feel that Financial Advisers violate their fiduciary arrangement by recommending specific financial products and implementing them, thereby earning either commissions or asset-based fees. I hope that these clear distinctions between Brokers and Life and Annuiity Insurance Agents on one hand and Investment Advisers in the profession they have volunteered to work in are clear.
Sincerely, Frank R. Prazma, CLU, ChFC