August 18, 2010
At first glance, the idea of a unified fiduciary standard seems almost unassailable. On some online forums for financial planners, the practitioner in the financial services area who voices ANY objections to such a unified standard invites not only criticism, but personal abuse. Why, after all, would any ethical advisor object to "putting the client's interest first"?
None would, if that were truly the issue. But it's not, and question-begging and ad hominem arguments will not make it so.
The Federal fidiciary standard is not only more stringent than the "suitability" standard that applies to those who recommend insurance and investment products and who earn commissions from such sales. It's DIFFERENT - because it was crafted to apply to individuals and entities who occupy a different position with respect to the consumer and who do a manifestly different sort of work.
The representative who sells a variable annuity or mutual fund to a consumer is acting as a SALESPERSON and both parties know it. That rep's job is to SELL PRODUCT. Certainly, he or she must render advice in connection with that sale, but where that advice is merely ancillary, it should not be viewed as being the same as advice rendered by investment advisors - whose advice IS the product sold.
Certainly, that rep needs to reveal all relevant facts regarding the proposed investment. Some believe that this includes the rep's commission, as though that commission will impact the benefits the consumer will reap in the same way as the direct charges that must be revealed under the current standard.
That's flawed reasoning. The amount of compensation actually received by the selling agent can vary enormously, from firm to firm, even when the exact same product is sold, but the benefits of that product to the buyer will not. The COSTS of the product must be revealed for the buyer to be able to do a cost/benefit determination. But the "agent level commission" isn't "costs".
As I noted, all relevant facts regarding the investment being proposed must be revealed. But would a fiduciary standard require that all relevant facts of alternatives not being recommended also be revealed? If so, would that apply to all alternatives for which the rep is contracted to sell or all alternatives, period?
The basic flaw in the argument that holds that a unified fiduciary standard should apply to ALL advisors is simple: The standard might be unified, but the activities to which it would be applied are not. Trust officers and portfolio managers are not product salespeople. Their role is different- as should be the standard to which they are held accountable.