“It is more important to do the right thing than to do things right.”–Peter Drucker
“Try not to become a man of success. Rather become a man of value.”–Albert Einstein
In my view, the primary purpose of our industry should be to serve clients by helping them identify and attain their financial goals. Advisors should see themselves as stewards of their clients’ financial well-being or, as Prof. Meir Statman once suggested, “financial physicians.”
Many share my view, but certainly not everyone agrees. As a result, there is a battle going on for the future direction of the industry.
I first dipped my toe into the financial services industry almost 45 years ago as a newly minted securities attorney in Washington, D.C. Then, clients seeking to secure their families’ financial futures visited a stockbroker and/or an insurance agent. Financial planners were rare birds.
Neither stockbrokers nor insurance agents were fiduciaries. They were sales agents for their firms. They didn’t make money giving advice. They made money when they sold something. Their financial incentives were very clear.
Yet those incentives did not entirely drive their behavior. My parents’ stockbroker was named Jack Canvan. When I was a kid, I remember going to his house for dinner and playing with his daughter, Nancy. My parents’ insurance agent was Marvin Daugherty. His son, Scott, was the first best friend I ever had. The system was what the system was, but neither Jack nor Marvin would ever have taken advantage of my parents. They put their clients’ interests first.
By the time I left my law practice and entered the asset management business almost 30 years ago, things had changed. There were many more independent financial advisors and financial planners who owed a fiduciary duty to their clients. Many were adopting the assets under management-based fee model and abandoning commissions entirely. It seemed that a new day was dawning.
In my blissful ignorance, I imagined that within five years—10 at the outside—this new fee-based fiduciary business model would destroy the old model and dominate the industry. I thought that advisors, now seeing the light of a better way, would flock to it. I thought clients, based purely on their own self-interests, would insist on it. I thought that the regulators, who are charged with protecting the investing public, would demand it. Boy, was I wrong.
Certainly, the new model grew and continues to grow, but nowhere near as quickly as I had assumed it would. The reasons are instructive. First, brokers like Jack and Marvin already had a client-first mindset. They felt no need to switch business models. It was their attitude, not the regulatory structure within which they worked, that determined their behavior.
In addition, many brokers didn’t like the idea of being required to put client interests first. They liked the sales agent business model and the rewards that came with it. They liked their clients too, but their job wasn’t to look out for them. It was to sell them products and services. The more they sold, the more they made. They had a me-first, not a client-first, mindset.
The independent fiduciary advice model also grew in a different direction than I expected. I thought all fiduciary advisors would have a laserlike focus on serving their clients’ best interests—to advise every client with the same care they would take in advising their own mothers. I saw the hallmarks of that business model as compassion, fairness, transparency, open architecture and objectivity. I thought they all would have a client-first mindset.
But there are both client-first and me-first advisors inhabiting the fiduciary advice space just as there are in the old sales agent brokerage space. Indeed, the new world is showing signs of looking suspiciously like the old world in some disturbing ways.
Here are some examples. Bob Veres wrote an article recently in which he bemoaned the fact that our new role models—the individuals and firms that get the most attention and appear most frequently in the industry press—are “empire builders” whose primary message is how advisors can grow faster, get bigger and make more money. Not a word about serving clients.
Many of these empire builders have gone public or taken on significant funding from private-equity firms. This is great for the owners and investors in these firms. Everyone likes a good liquidity event. But what about the clients? When was the last time you heard of a private-equity firm issuing a statement about its commitment to putting client interests first?
A quick look at the ADVs of some of these firms shows that they have not used their size and scale to benefit clients with lower fees. Apparently, the private-equity firms are more concerned with margin maintenance than fee fairness.
Another example is the emergence of proprietary products in many corners of our world. The brokerage world has been roundly criticized over the years for directing clients into proprietary products, yet similar practices in our world are drawing little comment. The automated advice platforms, or so-called robo advisors, have always positioned themselves as investor-friendly, yet a number have developed proprietary products and eased clients into them in highly questionable ways.
In the turnkey asset management (TAMP) world, too, we are seeing a growing number of firms develop proprietary mutual funds and use them to build client portfolios. Whatever happened to the ideals of objectivity and open architecture? Worse yet, many of these proprietary funds are being used to mask the fees associated with these portfolios. What about transparency?
In the same vein, many large asset management firms are now offering “free” portfolios through model marketplaces that consist exclusively of their own mutual funds or ETFs. One can hardly blame the asset management firms for this practice, but why are fiduciary advisors using them? Could a portfolio consisting entirely of funds from a single firm ever successfully pass through a truly objective due diligence screening process?
Another odious practice that has emerged is the practice of TAMPs buying client assets in return for free services provided to the advisor who brings those assets to the TAMP. In many cases, these services benefit the advisor but not the client. How can a fiduciary advisor justify using client assets to pay for services for themselves that do not benefit their clients?
Pay-to-play arrangements are another hallmark of the old brokerage model. Brokers in that world have access only to investment products that pay the stiff gatekeeper fee—the merits of the products are considered only after the check has cleared. Such practices are also now common at independent broker/dealers and some of the new model marketplaces.
The list of examples could go on, but here’s the point. Me-first advisors and client-first advisors exist in both the old sales agent brokerage world and the fiduciary advisor world. Certainly, there are differences between the two worlds, but there is not a bright line separating them.
Clients didn’t swiftly gravitate toward the fiduciary advisor business model and force change based on their own self-interest. They are confused by the practices in both the brokerage and fiduciary advice worlds and don’t grasp the regulatory standards applicable to either.
The regulators did not step in either to clear the fog or ensure a higher level of investor protection. Instead, they seem content to sip tea on the sidelines and avoid any action that might disrupt or inconvenience the brokerage world. Regulation Best Interest is the latest example.
All this is unsettling to a Real Fiduciary Advisor, like myself, and the others who believed the fiduciary advice model would bring about more rapid change. But we should not give up hope. Jack Bogle said the arc of history is on our side. Have patience and stay involved.
In the meantime, it is incumbent on every advisor, regardless of which side of the regulatory fence they sit on, to decide where they stand. Client-first or me-first?
We are all subject to the forces of fear, greed and ego that can take us off course if we let them. Put them aside, ignore the noise and see through the self-interested messages of the empire builders. Let your values guide you. Your clients are counting on you.