Fiduciary vs. Suitability

FPA, NAIFA Battle For Congressional and Public Support

If you recommend something that is suitable for a client after appropriate fact-finding and serious due diligence, you still may not be acting in the client’s “best interest” in accordance with a fiduciary standard.

Huh?

Sounds like double talk or an exercise in semantics. But, in fact, it’s the root of an intensive debate raging among financial advisors. It’s been going on for years but has taken on a new urgency in this economic and legislative environment.

It has become an important but lightly publicized part of the current financial regulation overhaul debate now going on in Congress. And it is pitting the nation’s two leading advisor organizations – the Financial Planning Association (FPA) and the National Association of Insurance and Financial Advisors (NAIFA) against each other.

These two organizations aren’t the only ones in the fight, but they’re the most prominent among FA readers. The FPA is part of the Financial Coalition, which also includes the National Association of Personal (fee-only) Financial Advisors and the CFB Board of Standards, which oversees the Certified Financial Planner designation. NAIFA’s allies are the Association of Advanced Life Underwriters (AALU) and the National Association of Independent Life Brokerage Agencies (NAILBA).

One issue surrounding the current conflict is a provision in the House-passed financial overhaul bill to bring all broker-dealers (and by extension their reps) and investment advisors under the same harmonized fiduciary duty. It was also in a Senate version of a Banking Committee bill until – just before FA press time – it was withdrawn and replaced by a provision requiring the Securities and Exchange Commission (SEC) to conduct a study of regulatory standards for brokers and advisors, then propose rules.

NAIFA and its allies lobbied Banking Chairman Christopher Dodd (D-Ct.) and other committee members to make this happen, arguing that the fiduciary provision “would force many agents to register as investment advisors even though they are already qualified as registered representatives and supervised by the SEC and the Financial Industries Regulatory Authority (FINRA).

Nearly three-quarters of NAIFA’s 53,000 members are registered reps of broker-dealer firms.

It is usually not clear whether a representative is acting as a salesperson guided by suitability standards, or as an advisor guided by fiduciary standards. And therein lies the problem for the FPA.

“Fiduciary sounds complicated because it’s fact-oriented, not check box A, B and C and we’re good to go,” said Dan Barry, head of the FPA’s Government Affairs office in Washington. “But it’s a pretty simple concept dealing with loyalty and care. It’s just putting your client’s best interest first.”

But it’s not quite that simple for Tom Currey, CLU, ChFC, LUTCF, of Grand Prairie, Texas, national president of NAIFA.

“The application of a fiduciary standard for someone who also provides products is a real challenge,” Currey told FA. “The very way we talk about fiduciary is a little loosy-goosey; it’s not very well-defined. When we hear fiduciary, we think lawsuit. Our biggest concern is having the careers of our members, most of whom are financial advisors and salespeople, determined by one lawsuit at a time.”

“There has to be some form of accountability,” countered B
arry. “Investment advisors have been working under this standard for decades. Have you ever heard one of them say I’m getting sued up to my wazoo?.
Brokers say it’s not workable, we say it’s been working

45 years for investment advisors and they haven’t been sued out of business. The insurance folks might have to disclose more and alter their way of doing business, but that’s something the client deserves. If you can’t sell your product and have it be in your client’s best interest, maybe you shouldn’t be selling them that product.”

Should all financial products and services be sold under the fiduciary standard and the suitability standard abolished? Some say “Absolutely. Everyone should be required by law to act in their clients’ best interests. It’s the fiduciary standard that separates the professionals from the sales people.”

A small group of influential fee-only advisors called The Committee For The Fiduciary Standard has joined the fray, claiming it’s the only group “solely dedicated to policy education on the authentic fiduciary standard.

This, they say, “legally requires a financial advisor to act, like a medical doctor, completely in their clients’ best interest.

“In contrast, the ‘arms length’ (suitability) standard allows a broker or advisor to sell clients products in the best interest of his or her employer. This difference is stark. If an investor is wronged by a (suitability) advisor, the investor’s burden is to prove the advisor is wrong; if the investor is wronged by a fiduciary advisor, the advisor’s burden is to prove he or she is right.”

But being held to a fiduciary standard doesn’t automatically make an advisor “purer” than one who isn’t. Indeed, the most recent arbitration statistics from FINRA show 2,838 cases involving breach of fiduciary duty vs. 1,181 for unsuitability.

And, as NAIFA’s Currey noted, “the most public bad actor of recent years – Bernie Madoff – operated under a fiduciary standard.”

A related issue stirring the pot is the FPA and the Financial Planning Coalition effort to establish financial planning as a recognized, regulated profession. The Coalition says its proposed legislation would:

* “Bridge the gap that lets incompetent or unethical financial professionals call themselves financial planners. . . and

* ”Provide a safe haven for Americans looking for a competent, ethical financial planner who is held to meeting and maintaining ethical standards.”

What upsets the FPA is that some salespeople, notably insurance folks, are posing as financial planners to a consuming public that can’t tell the difference. So the FPA wants a special oversight board to regulate those holding themselves out to be financial planners.

“Now,” said Barry “there is nothing in law to help consumers looking for a financial planner tell who is competent.”

But NAIFA, seeing this a back door way to bring insurance agents under the fiduciary standard, has so far successfully opposed this. NAIFA notes that insurance advisors are already regulated while investment advisors are not.

The FPA’s Barry counters: “If you don’t want to be regulated as a financial planner, all you have to do is not hold yourself out as one.”

NAIFA also fears the FPA proposal would give the CFP Board regulatory powers resulting in the CFP designation being the “badge” that identifies advisors using the fiduciary standard.

“It’s not fair to disenfranchise thousands and thousands of folks who hold the CLU (Chartered Life Underwriter) and ChFC (Chartered Financial Consultant) designations, which are every bit as good,” said Currey

FA