© 2019 SourceMedia. All rights reserved.

Are Clients' Interests Really Coming First?

I asked about a dozen wirehouse advisors in recent weeks whether they felt that they always acted in their clients’ best interest, as their fiduciary. Everyone said yes.

Is there a wealth management CEO who would not tell a high-net-worth client that the preservation and growth of his or her wealth is the most important responsibility that his firm has?

It’s time for the wealth management industry to state publicly: “Our clients’ interests come first.”

And, yet, that is a long way from happening. According to the Investment Advisors Act of 1940, investment advisors are fiduciaries whose duty is to serve the best interests of their clients by seeking to eliminate, or at least to make aware, all potential conflicts of interest which might lead an IA — consciously or unconsciously— to give advice that was not in the clients’ best interest

This is contrasted with the standard by which broker-dealers operate. The suitability standard, as defined by the SEC, is having a reasonable basis to believe a recommended transaction or investment plan involving a security or securities is a good fit for the client.

This is based on the data the B-Ds obtained through the reasonable diligence of the member or associated person to determine the investment profile of the client.


The suitability standard is simply not the same as the fiduciary standard. Recent industry surveys show again and again that many clients do not understand how their financial advisors are paid or understand the differences between the two standards. 

Yet, for bigger business, some advisors are not getting a chance to compete for the new relationship, simply because the prospect wants to deal with an RIA, not a stockbroker.

“I have lost several [opportunities] over the last year to RIAs simply because of the perceived conflicts of interest within the brokerage model,” says one top-producing wirehouse advisor. Like some others interviewed for this article, this person asked to remain anonymous because they did not have permission to speak publicly.

In their decisions involving an aggrieved brokerage firm client who accuses a wirehouse advisor of malfeasance or mismanagement of the client’s assets, arbitration panels do not distinguish between suitable behavior and fiduciary behavior. Brian Hamburger, founder and CEO of MarketCounsel, tells me that arbitrators lack the sophistication to discern whether the disputed behavior was acceptable because it met the lower standard of suitability.

So, wirehouse advisors proudly say that they act with their clients’ interest first. Yet, they are losing more and more opportunities to grow their businesses because sophisticated investors will often not move their money to a nonfiduciary brokerage firm. When deciding upon awards for allegedly harmed investors, arbitration panels do not consider any lower standard of care as a material distinction. And brokerage firm executives know that their businesses survive by how well they care for their clients’ assets.

Yet wirehouse executives remain afraid of the fiduciary standard. Why? Because they make a lot of money as brokers, which is what is forbidden by the current fiduciary standard:

• Brokerage firms still do a great deal of business on a transactional basis, which is not permitted under the current fiduciary standard. Bob Matthews, CEO of Fieldpoint Private, a wealth management firm in Greenwich, Conn., argues: “The industry should stop confusing the method of payment with ethics. Character and integrity are not legal terms, they are human behavioral terms. Clients are best served by choice and any advisor should choose with the client the best payment method for the client, given the situation.”

Fieldpoint, though 90% fee based, also has a broker-dealer because it allows its advisors to accommodate the client with the best pricing and implementation solution for their needs.

Charging a fee where the client is better suited to pay a commission is clearly violating the duty to clients and is certainly not in the best interest of the client. The liquidation of a concentrated stock position and the one-time liquidation of a portfolio are examples of transactions better suited to a commission model. In addition, in an environment where interest rates are close to zero, charging a fee to manage a bond portfolio is difficult to justify. Clients are usually better suited to pay a commission for each bond bought or sold.

• Brokerage firms make money by making SMA managers and mutual funds pay for access to their advisors. This is disclosed and not illegal. It is also a conflict of interest.

• Even though the brokerage industry has largely divested itself of proprietary products, the industry still manufactures some products, namely new issues of stocks and bonds. They win these deals because they have distribution; brokers need advisors who have clients who want these products. There is a synergistic relationship between the brokerage firms’ investment bank and wealth management arms.

While some advisors within the brokerage industry are among the top practitioners in their field, the ones that I polled also acknowledge that they have many colleagues who think of themselves and their earnings before their own clients. I asked several what percentage of the wirehouse advisors whom they know they would trust with their own family’s money if they passed away. In every case, the top advisors told me that they would trust fewer than half of their colleagues to handle their personal money.

Hamburger thinks that most of the advisors he knows are ethical and act in their clients’ best interest. But he stresses that the industry needs one fiduciary standard and cannot leave the consumer to figure out whether his or her advisor is ethical. “We have one speed limit for everybody — we don’t test every driver and give everyone an individual speed limit based upon his or her driving ability,” he says. “We should have one standard of care, which gives the same ‘rules of the road’ for everyone.”

In my 30 years associated with the wealth management industry, I’ve observed scandalous behavior of brokerage firms firsthand. E.F. Hutton floated checks, Prudential-Bache sold heavily loaded limited partnerships, and the industry slanted research reports, deceiving investors, to win more investment banking deals. Virtually every month brings a new headline where some Wall Street firm is fined by regulators for breaking the rules.

It’s time for the RIA segment of the wealth management industry to acknowledge that it is sometimes in the best interest of the client to pay a commission instead of a fee.

But it’s also time for the broker-dealer segment of the industry to voluntarily say that the client comes first, that the trust given in managing a client’s savings is inviolate and sacred, that the conflicts built into their model must first be disclosed and then ultimately eliminated.

Alternatively, broker-dealers can wait for regulators and angry clients to expose the next scandal while hanging on to an indefensible ethical point of view, suitability, that is costing them both their reputations and some of their market share.


For reprint and licensing requests for this article, click here.