Financial Sales Force Continues To Resist Duty Of Care

by: Danielle Park, CFA
Summary

No new Federal push for fiduciary reform has ensued since the US Labor Department’s rule requiring a fiduciary standard of care from advisors was quashed.

In response, states like Maryland, New Jersey and Nevada are advancing proposals for a state level fiduciary standard for broker-dealers and financial advisors.

The next bear market will once more highlight the contrast between fiduciary advisors and sales people.

The US Labor Department’s rule requiring a fiduciary standard of care from advisors giving retirement advice was quashed last summer, and no federal efforts on this critical front have since materialized. The industry-friendly SEC meanwhile put forward a watered-down Reg BI ‘Best Interest’ standard that allows conflicts of interest to remain largely intact. Not surprisingly, the North American Securities Administrators Association (NASAA) has commented in favour of the SEC proposal, while the Investment Adviser Association, representing federally registered advisors who are already subject to a fiduciary standard under the Investment Advisers Act, have pointed out that the BI standard will allow the conflicted advice broker/dealers provide to continue.

In response, states like Maryland, New Jersey and Nevada are advancing proposals for a state level fiduciary standard for broker-dealers and financial advisors, and industry associations are working hard to push back. See Nevada, Maryland and New Jersey push fiduciary proposal.

The insistence on a fiduciary standard in financial advising is not going away. Two decades of allowing the sales force to put their profits ahead of the best interests of their clients have undermined the strength and stability of families, companies and governments alike. We all continue to pay the price for undersaved populations engaged in speculative products and activities ending in losses they cannot afford.

Many clients and financial sales representatives remain blind to the difference here; for more see What makes a financial advisor a “true” fiduciary:

“Ultimately, a fiduciary operates without conflict and with one driving force: the clients’ best interests. As this sentiment amongst advisors grows, it will continue to serve as one of the most significant catalysts for migration to the independent space…

When we look at those who are breaking away and forming their own firms, we recognize that they’re making a fundamental change from being an employee to being a business owner, from being a broker to being a fiduciary advisor and from being a product advocate to being a client advocate.”

The ability to prioritize the clients’ best interests without limitation was the reason that my partner and I left a bank-owned broker/dealer in 2003 to found Venable Park Investment Counsel Inc.

As in 2000-03 and 2007-09, the next bear market will once more highlight the contrast between fiduciary advisors/managers and the salesforce. Once losses hit, sales firms are always the first to point out they’re not fiduciaries, and that clients bear responsibility for their own capital losses.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.