Whenever the enemies of a strict fiduciary standard offer their helpful advice to the SEC or the Department of Labor or testify before Congress, they make a curious argument. If the regulators require them to live up to a principles-based standard of care, they say, then they would no longer be able to "afford" to serve the millions of people who don't have large investment portfolios - and those poor middle-income citizens would be stranded in a world where nobody is willing to provide them advice.
You can read through some of the latest testimony at the SEC website. After surveying its members, the National Association of Insurance and Financial Advisors reports that almost half of its members (that is, insurance agents) would stop working with less-wealthy clients if they were required to act as fiduciaries. Meanwhile, the Association for Advanced Life Underwriting (which represents successful insurance agents and managers) says that if a fiduciary duty were imposed on its members, it "could potentially affect their relationship with, and their ability to serve, their customers."
Later, it tells us that "the broker-dealers that attempt to continue serving middle- and lower-net-worth clients would likely respond by reducing the number and types of products offered to those customers." Hit particularly hard would be consumers who have less than $250,000 to invest.
Last year, the Financial Services Institute - the trade and lobbying organization of independent broker-dealers - made similar comments. If they had to live under a strict fiduciary standard, FSI officials said, broker- dealers would respond by "limiting their services and advice to only those investors who offer significant profit potential, thereby reducing investor access to products and services." This would "limit investor choice, product access and affordable access to financial services for all investors."
And in one of SIFMA's comment letters to the Labor Department in regard to its fiduciary proposals, the group offers a dire warning, predicting that "there will be limited retirement planning help, as well as the guidance necessary to educate about the tax consequences of taking a withdrawal, loan or hardship distribution. Even simple discussions regarding saving in the appropriate retirement plan or helping clients make pretax or post-tax distribution decisions will become cost prohibitive or obsolete."
SHOOT THE BYSTANDERS
When I read comments like this, I can't decide whether I'm looking at blackmail or hostage negotiations from financial terrorists. The organizations whose representatives mostly sell products for a living are threatening - in the clearest possible terms - to withhold all services they currently provide to less-wealthy investors. They will be "forced" to harm the general public by pulling out of the wide blue ocean of middle-class investors.
The message is: "Don't come any closer, coppers, or I'll be 'forced' to start shooting these innocent bystanders."
These hostage negotiations have received a strange degree of credibility in some news outlets and in policy debates. But I propose that we simply dismiss all arguments made by people acting as financial terrorists for three reasons.
First, because we don't believe them. If the brokerage firms, insurance agents and B-D reps really are the backbone of advice and service to the middle market, are we to believe that they're going to refuse to make those sales in the future? They might be "forced" to hold their collective breath and turn blue for a few minutes, but I suspect that once a fiduciary standard is passed, they'll still be willing to sell a reasonably priced variable annuity to somebody who knocks on their door with less than $100,000 in his pocket. "Reasonably priced" might inflict serious pain on their existing bottom line, but assuming there's a profit - as there is with a lot of products recommended by fiduciary advisors - they'd be fools to walk away from it.
Second, these are really threats disguised as arguments. These groups should be asked: Are you really so unconcerned about the welfare of middle American consumers that you would deliberately walk away from their pressing need for financial advice simply because you don't want us to make you live up to the same standards as RIAs? If so - that is, if you do care so little about these customers - are you the organizations we want to rely on to serve middle America's financial needs in the first place? What are you doing to them now in the guise of advice?
Finally, we should ignore this line of reasoning because even if all the brokerage firms and reps of independent B-Ds and insurance agents go into a royal snit and decide to turn their backs on less wealthy consumers, there are still plenty of sources of financial advice for those orphaned customers to turn to. Yes, I'm talking about the RIA and fee-only communities - who, we are constantly told, will work only with the extremely wealthy segment of society.
Yet that's not quite right. In fact, many fee-only advisors work on an hourly or retainer basis with most anybody who walks in the door - and I'm not just talking about members of the Alliance of Cambridge Advisors and the Garrett Planning Network. Larger financial planning shops are also creating departments that will provide advice to less-wealthy clients. Almost all advisors I've ever talked with have middle-market clients on their books; some specialize in them. Younger advisors, meanwhile, are building service models that cater to their Gen X/Y peers, most of whom are not (yet) wealthy.
WAITING IN THE WINGS
Beyond that, a host of websites now provide increasingly sophisticated financial advice. Wealthfront, Betterment, goalgami, Personal Capital, LearnVest, EverBank Wealth Management and Covestor all offer investment portfolios and financial advice. Some of them provide access to flesh-and-blood advisors on the phone or online video on an as-needed basis. You can bet that these startup companies would love it if millions of investment consumers were suddenly up for grabs.
Even if the big-name financial institutions and the general agents down the street want to walk away from the middle market, the middle market will somehow manage to survive the experience. Indeed, based on what we can infer from this hostage-taking posture, I suspect they would find better, more reliable and less- conflicted advice in the process.
These sales organizations and sales professionals are the only ones who think they're totally essential to the well-being of America's middle-market financial consumers.
Based on our experience since the Dodd-Frank Act, the SEC is going to keep asking for and collecting comment letters until the stacks of paper fill up the headquarters building and start spilling out of the top-floor windows. Perhaps, as we go through tiresome round after round after round of hearings, while the same people say the same things, we should start eliminating some of the plainly spurious arguments and focus on more concrete issues. Nuke the hostage negotiations! Banish the blackmail!
FOR WHOSE BENEFIT?
Maybe, in the future, the SEC can mix it up a bit and ask for comment letters on more specific topics. I'd like to see SIFMA's response to a request for comments on whether it really is possible for a broker to sell a structured in-house derivative product that costs more and pays a higher commission than the alternatives - a product that the company is betting against for its own account, knowing the product will blow up in a customer's face - and still operate under a meaningful fiduciary standard.
I'd like to see NAIFA poll its members on how many of them would continue to believe that variable annuities are an important component of a person's financial well-being if those products suddenly stopped paying them commissions. And all of the sales organizations could help us understand the grave harm that the elimination of high-commission incentives would do to the consuming public.
The regulators could even ask all parties to comment on how threats of financial terrorism influence our regulatory debates - and to answer the more important question: Should they? FP
Bob Veres, a Financial Planning columnist, is publisher of planning industry website Inside Information. Post comments on his columns at financial-planning.com or email them to firstname.lastname@example.org.
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