by Ronald E. Hagan
CEO, Roland|Criss
The results of an eye-popping survey* conducted by consumer groups, financial planning organizations, and an association of states’ securities regulators were announced this week. The survey revealed that investors are oblivious to the vast differences in legal standards among the various classes of “investment advisors.”
What’s wrong with this picture? While nearly all of the respondents (97%) believe that stockbrokers, investment advisors that serve pension plans and foundations, and insurance agents should put investors’ interests first (the “fiduciary duty”), very few of them said they know that various laws say otherwise.
For example, sixty percent of the investors surveyed said they thought insurance agents had to uphold a fiduciary duty, which isn’t true, even though ninety-six percent said the fiduciary requirement should include insurance agents that sell annuity-based products. (It’s no surprise that insurance agents are the most outspoken opponents of the government’s current effort to make a universal fiduciary standard apply to all investment advice givers.)
More Evidence of Confusion
Thirty-four percent of the investors surveyed believe that investment advice is the number one service provided by stockbrokers. The law under which stockbrokers are licensed defines their primary role, however, as buying and selling stocks and other securities, with no requirement that they place their clients’ interests first; no fiduciary duty here!
Seventy-seven percent of respondents admitted they knew that registered investment advisers ("RIA") are licensed under a federal fiduciary standard. Most respondents did not realize, however, that RIAs’ can escape consequences if they can get their clients to retain “full discretion” over investment decisions. (This is the common practice among RIAs in the pension and foundation arenas.)
The Laws are Stupid and Dangerous
The survey proves what many experts in fiduciary standards already knew…investors have been bewitched by unfair sales tactics and bewildered by contradictory claims made by competing investment advice providers. When the truth emerges, many investors feel stupid…some even angry. Investors are not stupid, though. The same cannot be said about the laws that empower stockbrokers, RIAs, and insurance agents to ply their trade. Not only are the laws stupid, they are dangerous. The danger lies in the widespread, but wrong assumption held by many pension and foundation executives that their investment advisor carries the fiduciary burden. Many executives are finding out about the error in their assumption, the hard way.
Here’s How You Can Make Your Fiduciary Job Safer
In January 2011, the U.S. Securities and Exchange Commission will appear before the U.S. Congress to ask for an addition to the new financial services law. The SEC wants a universal fiduciary standard to be added to the law. The amendment will embrace any person or firm that delivers investment advice; pension consultants, RIAs, stockbrokers, insurance agents, and financial planners.
As you might guess, the investment advice providers are up in arms over the SEC’s initiative. They have been fighting for position for months. Pension plan sponsors and foundations have been mostly silent. Why? There are two likely reasons: (1) the vast majority of investment advisors benefit from the current state of confusion among investors and are content to let their clients' remain out of touch with the fiduciary debate, and (2) the fiduciary interests of plan sponsors and foundations are not well represented at the regulatory level.
You should be counted on this issue. Send a comment to me on this Blog and I will see to it that your voice is heard when the Congress begins debating the issue.
*The Survey
Conducted by Infogroup Inc., which provides market research services, the survey tested the reactions of nearly 1,400 people that defined themselves as investors. The survey’s sponsors included AARP, CFA, Certified Financial Planner Board of Standards, Inc., Financial Planning Association, Investment Adviser Association, National Association of Personal Financial Advisors, and the North American Securities Administrators Association, which developed the Uniform Prudent Investor Act (“UPIA”).