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Will The Real Fiduciary Please Stand Up?

WILL THE REAL FIDUCIARY PLEASE STAND UP?


As an investment professional, I am in support of standards that elevate the duty of care which the Department of Labor’s (DOL) IRA Fiduciary Rule and the new SEC's Regulation Best Interest standard attempt to achieve. However, now that I have seen how some brokerage and investment firms are using the rules to adjust their sales pitches and market their advisers as Fiduciaries, I’m not sure the rules will be effective in protecting investors from getting another sales pitch instead of advice. Under the Fiduciary Standard, advisers must place client interests first and disclose any potential conflicts of interests which includes full transparency on all compensation arrangements.  Since not all investment accounts would be covered under the IRA Fiduciary Rule, there are many ways salespeople could skirt the disclosures while still maintaining the title of Fiduciary.  Hence the question: Will the real Fiduciary please stand up?

 

“My Adviser is a Fiduciary”


Some investors believe, their investment provider is a Fiduciary.  Whether this is a true statement depends upon the meaning of the word ‘is’ is (recall William Jefferson Clinton’s Grand Jury testimony in 1998).  Just because your adviser ‘is’ a Fiduciary does not necessarily mean 100% of his/her investment recommendations are being made under the Fiduciary Standard.  The complexity arises because not all recommendations fall under the same standard.  It should come as no surprise that the recommendations with the highest commissions (or sales credit) do not meet the Fiduciary Standard and are sold with very few, if any, disclosures on compensation.  How is an adviser able to seamlessly switch from Fiduciary to a sales broker, without the client being aware that the standards for conduct and disclosure have changed?  Enter: Dual registration.

 

Dual Registration, Double Standard


A recent Securities and Exchange Commission (S.E.C.) study revealed that approximately 88% of investment adviser representatives were also registered representatives of a FINRA registered broker-dealer.*  Stated another way, almost 9 out of 10 investment advisers are dually registered which allows them to charge an advisory fee and/or sell products for commission to the same client.  When acting as an investment adviser, the client typically pays a fee percentage based on the assets being managed.  This activity falls under the Fiduciary Standard.  As a broker, the commissioned products (like loaded mutual funds, non-traded REITs, annuities and life insurance), generally, fall under a lesser standard with minimal disclosures.  Because of this disparity, it is important for investors to ask and know which hat their adviser is wearing when getting recommendations from someone who is dually registered.

 

The Truly Hidden fees: Firm Level Contracts


A lot of the discussion about the DOL’s IRA Fiduciary ruling has been focused on the impact at the adviser level.  However, the full disclosure of compensation up through the firm and affiliates of the firm would be a welcomed outcome of the ruling.  This disclosure would quantify the hidden fees such as kick-backs from recommended products, revenue sharing arrangements with other firms, proprietary fund fees, interest earned on loans for clients and profits from lending of their securities.  Moreover, this may explain why certain products make the firm’s “approved” products list while lower cost options are excluded.  In my view, the IRA Fiduciary Rule would start to shed some light on these business practices at the firm level that even the adviser may not be fully aware of the arrangements.

 

Bank and Trust Companies are Not Immune

To further the discussion, Bank and Trust Companies are not necessarily held to the Fiduciary standard, unless hired specifically as a corporate trustee.  Just like brokerage firms, Bank and Trust Companies may establish affiliate firms offering mutual funds, ETFs, hedge funds and other products to increase the firm’s overall revenue.  These products reduce the fee transparency and mask the total fee paid to the firm by the client.  Should a Fiduciary be able to select their own funds and increase their revenue when managing an investment portfolio?  The DOL’s ruling addresses this conflict of interest by requiring Fiduciaries to collect a level advisory fee which cannot fluctuate based on the investment selection.  The level fee is calculated at the firm level, not just the adviser level.  Therefore, all products managed by affiliate firms, all revenue sharing arrangements with outside firms and even the money market fund fees will need to be evaluated and kept at a level rate to satisfy this Fiduciary requirement.

 

What Does Fiduciary Advice Look Like?


Based on my work experience at a major brokerage firm, a local broker-dealer and a global trust company, I was inspired to start Forza Wealth Management, LLC to provide independent objective advice to our clients.  Forza Wealth Management, LLC is a Registered Investment Adviser (RIA) firm and is held to the Fiduciary Standard 100% of the time.  We do not have affiliates or outside business activities to generate commissions.  We do not have revenue sharing arrangements with the investments we recommend.  Our only source of revenue comes from advisory fees paid directly by clients.  Given our firm’s structure, the DOL’s IRA Fiduciary Rule and the SEC's Regulation Best Interest standard would have little to no impact on the way we conduct business now, or in the future.  Whether the rule goes into effect or not, these conversations are educating consumers about the differences in standards within the financial industry and that is a step in the right direction.  My hope is that, all investors will require their advisers to abide by the Fiduciary standard 100% of the time, or choose another adviser that is the real McCoy.

 

Michael E. DeMassa, CFA, CFP®
Founder & Principal

Mr. DeMassa has over 20 years of experience advising clients to help them achieve their retirement and income goals.  He is a graduate of M.I.T. and holds both the CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Analyst designations.

 

Learn more at www.forzawealth.com

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*Study of Investment Advisers and Broker-Dealers- U.S. Securities and Exchange Commission Jan. 2011

This article is provided by Forza Wealth Management, LLC for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. 

Information on this web site is directed toward U.S. residents only. Forza Wealth Management, LLC is registered as an investment adviser with the State of Florida and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

*Winners appearing on this page do not pay a fee to be considered or to win the Five Star Award. Professionals with a digital profile have paid a promotional fee.
The Five Star Wealth Manager award, administered by Crescendo Business Services, LLC (dba Five Star Professional), is based on 10 objective criteria. Eligibility criteria – required: 1. Credentialed as a registered investment adviser or a registered investment adviser representative; 2. Actively licensed as a registered investment adviser or as a principal of a registered investment adviser firm for a minimum of 5 years; 3. Favorable regulatory and complaint history review (As defined by Five Star Professional, the wealth manager has not; A. Been subject to a regulatory action that resulted in a license being suspended or revoked, or payment of a fine; B. Had more than a total of three settled or pending complaints filed against them and/or a total of five settled, pending, dismissed or denied complaints with any regulatory authority or Five Star Professional’s consumer complaint process. Unfavorable feedback may have been discovered through a check of complaints registered with a regulatory authority or complaints registered through Five Star Professional’s consumer complaint process; feedback may not be representative of any one client’s experience; C. Individually contributed to a financial settlement of a customer complaint; D. Filed for personal bankruptcy within the past 11 years; E. Been terminated from a financial services firm within the past 11 years; F. Been convicted of a felony); 4. Fulfilled their firm review based on internal standards; 5. Accepting new clients. Evaluation criteria – considered: 6. One-year client retention rate; 7. Five-year client retention rate; 8. Non-institutional discretionary and/or non-discretionary client assets administered; 9. Number of client households served; 10. Education and professional designations. Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers. Award does not evaluate quality of services provided to clients. Once awarded, wealth managers may purchase additional profile ad space or promotional products. The Five Star award is not indicative of the wealth manager’s future performance. Wealth managers may or may not use discretion in their practice and therefore may not manage their client’s assets. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or this publication. Working with a Five Star Wealth Manager or any wealth manager is no guarantee as to future investment success, nor is there any guarantee that the selected wealth managers will be awarded this accomplishment by Five Star Professional in the future. For more information on the Five Star award and the research/selection methodology, go to fivestarprofessional.com. 602 Sarasota area wealth managers were considered for the award; 60 (10 percent of candidates) were named 2019 Five Star Wealth Managers. 2018: 626 considered, 52 winners; 2017: 434 considered, 40 winners; 2016: 464 considered, 96 winners; 2015: 602 considered, 112 winners; 2014: 849 considered, 146 winners; 2013: 652 considered, 141 winners; 2012: 530 considered, 149 winners.