Is Your Investment Professional A Fiduciary? | 2 Reasons Why
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Is Your Investment Professional a Fiduciary? (If not, watch out!)

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Updated November 12, 2017

Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.

Yan Arsenault, CFA®, CAIA® – Vice President, Investments

A recent report from the White House Council of Economic Advisers estimated that hard-working Americans are losing $17 billion each year from their IRA assets alone—the equivalent of 1% of return annually from those assets—due to conflicted investment advice. That is a big number.

What is “conflicted investment advice,” and how is it costing people so much money? The core of the issue is that in the financial industry, not all buyers of investment products or advice are entitled to the same level of legal protection and care. The duties owed to clients by various investment professionals are significantly different. This is because the regulatory regimes that govern them differ. 

In a nutshell, some “advisors” manufacture and sell financial products. Others are legally bound to provide investment advice that serves the clients’ best interests, not their own.

Understanding the differences between the two is critical.

At Trust Point, our philosophy is simple. We believe that in doing what is best for our clients, we will be doing what is best for Trust Point. We do not manufacture or sell financial products (annuities, insurance, proprietary mutual funds, etc) but provide tailored wealth-related advice that meets the highest standards of objectivity, ethics and transparency.

What’s the difference?

Broadly speaking, three main regulatory regimes cover the U.S. financial industry:  the SEC and its state counterparts; banking regulators; and watchdogs over brokers and insurance agents.

Investment advisors are registered with the Securities and Exchange Commission (SEC), or with state securities regulators if they manage less than $100 million. They are governed by the Investment Advisors Act of 1940. Investment advisors have a fiduciary duty to their clients—a legal obligation to act in their clients’ best interests at all times. Fiduciary duty is a well-established legal principle backed by decades of precedent.

Trust companies (and bank trust departments) incorporate the same standard of fiduciary duty in their relationships with clients. Their regulators may include, but are not limited to, state banking authorities, the Office of the Comptroller of the Currency (OCC), the Federal Reserve, or the Federal Deposit Insurance Corporation (FDIC).

In addition to the legal obligation to put their clients’ interests ahead of their own, fiduciaries also must adhere to defined duties of loyalty and care; they must provide up-front disclosures to a client before an agreement is signed; and they must either eliminate conflicts of interest or fully disclose any unavoidable ones.

The last group of advisors is made up of brokers and insurance agents. Brokers do business under the Securities and Exchange Act of 1934 and are self-regulated by the Financial Industry Regulatory Authority (FINRA).  Insurance agents are governed by state insurance regulators. Brokers and insurance agents have no fiduciary duty. Instead, they operate under the less-strict standard of suitability.

This means that brokers and insurance agents’ obligation is limited to reviewing a client’s financial needs, objectives, and unique circumstances before providing advice or making investment recommendations that are suitable.

It is good to know whether your advisor is required merely to act in a manner that could be defended as “suitable” in light of your goals and objectives, or if the advisor is required to act purely in your best interest.

Wisconsin’s oldest and largest independent trust company, Trust Point takes great pride in the fact, by law and principle, it fully incorporates the standard of fiduciary duty and therefore, it has and will always sit on the same side of the table as its clients.

Why does it matter?

Over the years, it has become increasingly difficult for investors to differentiate between all of the professionals who want to offer them advice. Titles such as wealth manager, wealth advisor, financial advisor, investment consultant, investment manager, investment advisor, portfolio manager, and registered representative are used indiscriminately today. This alphabet soup of titles was designed by the industry to inspire trust and confidence, but for the most part, the titles don’t mean much…unless you take the time to look under the hood.

In any industry, the way people are compensated usually goes a long way toward explaining how they behave.  The financial industry is no exception. This raises an important distinction.

Fiduciaries are “fee-only” advisors. That means they can charge only for their advice and expertise, normally in the form of an hourly or flat fee—or, most commonly, a percentage fee based on assets under management. Fiduciaries usually have discretionary authority over a client’s account and are allowed to invest based on the parameters set with the client at the beginning of a relationship. Fiduciaries provide ongoing advice as the client’s needs change over time and adjustments to the investment plan are required. Fiduciaries do well if you do well. Their self-interest lies in helping to grow your wealth.

Brokers and insurance agents employ a “fee-based” model. They get paid based on products sold. These payments come in the form of commissions, referral fees, or kickbacks. In other words, brokers and insurance agents are essentially salespeople. They are not required by law to put your interests ahead of theirs.

This may affect the way they do things such as select securities and build your portfolio. For instance, they might invest your assets in higher-cost funds, such as a “retail” share class of mutual funds, to collect on revenue-sharing payments from the mutual fund companies (watch for Class A, B, or C shares, in particular).

Similarly, there is nothing to prevent them from recommending the parent company’s sponsored mutual funds (to receive a higher personal payout), regardless of past performance or onerous, built-in, hidden fees.  Life insurance policies and annuities are known to have massive embedded commissions, but that doesn’t prevent insurance agents from advocating strongly for their use. Brokers and insurance agents don’t necessarily do well if you do well. They do well if you take action.

Regulators to the rescue?

Few will argue the point that the fiduciary standard is superior to the suitability standard when it comes to protecting investors. So why would you want to give your assets to someone who doesn’t necessarily have your best interest at heart?

Regulatory authorities lately have been asking themselves the same question.  In the wake of the 2008-09 financial crisis, regulators have intensified their efforts to provide more transparency and clarity to investors.

The debate over ethical standards was encoded in the 2010 Dodd-Frank Act, which authorized the SEC to create regulations that would impose a uniform fiduciary standard of care for retail investment advice. After years of industry opposition, the debate about that standard is now back on the front burner.

While the SEC’s chairwoman, Mary Jo White, recently indicated her support for a uniform rule for brokers and advisors, the journey ahead is still uncertain.  For too many years now, politics have prevented the SEC from moving swiftly, as lobbyists representing large brokerage firms and insurance companies oppose changes to their clients’ very lucrative commission-based-sales business models. Even disregarding the efforts of those lobbyists, the current push for a uniform standard of care could be derailed by the election of a new president in 2016.

In the meantime however, the Department of Labor, at the request of President Obama, has made the issue a top priority. The DOL recently resurrected a proposal from 2010 to expand the obligations of fiduciary status to include a wider range of people providing financial advice to retirement-plan sponsors, plan participants, or IRA owners. The move is aimed specifically at brokers and insurance agents. Just as individuals often can’t recognize the wolves dressed in advisors’ clothing,  many retirement-plan sponsors don’t really understand the inherent conflicts of interest surrounding the “advisors” with whom they are working.

There are too many such conflicts, hidden fees, and lacks of appropriate disclosure in the financial industry today. At Trust Point, we share the desire of the SEC and DOL to better protect and inform retail investors and plan sponsors. Investor confusion about the different standards applicable to investment professionals is an important issue that needs to be addressed. We believe that well-crafted reforms would go a long way toward instilling greater investor trust and confidence in our industry.

How can you protect yourself?

First, don’t wait for the regulatory authorities to take action; that won’t happen immediately, and it might not happen at all. Ask your financial professional today if he or she is required by law to act as a fiduciary.  Anyone who purports to uphold a fiduciary standard should be willing to put it in writing for you. It’s as simple as that.

Secondly, be careful of “dual” or “hybrid” advisors. In recent years, many traditional brokers have used exemptions from the SEC to allow themselves to operate as both advisor and broker. Although legal, that business model presents multiple conflicts and is purposefully confusing to clients.  On Tuesday these people will put on their “advisory” hats and provide advice for a fee; on Wednesday they will sell you a financial product and accept a commission for doing so. In almost every one of these hybrid situations, the temptation is omnipresent to steer clients to whichever option will net the advisor the biggest paycheck. That represents a huge conflict of interest.

How would the proposed change affect Trust Point?

The DOL and SEC initiatives, if pursued, are likely to cause a massive change in the industry. But they would  have no direct bearing on Trust Point’s model. By law, our organization already incorporates the standard of fiduciary duty and has done so since 1913.

Trust Point is an independent trust company regulated by state bank regulators. Many consider the fiduciary standards of trust companies to be the strictest and highest in the financial industry. Fiduciary duty is at the core of what we do every day. Whether our clients have a trust relationship or an investment relationship with us, the same fiduciary principles apply. We don’t combine product sales with giving advice. Everything we do is focused upon the client’s best interests. Our business model and our company structure are built to ensure that there are no conflicts between our self-interest and yours.

Bottom-line

There will always be volatility in markets, and nobody can guarantee that investors will enjoy rewards divorced from risk. But you can ensure that the investment advice and management you get comes from a firm that is legally required to put your needs before its own—a firm that uses a business model with no built-in conflicts of interest. In fact, that is one of the most important decisions an investor will ever make.

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Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.