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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.


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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. 

Forza Wealth Management LLC is an SEC-registered investment adviser domiciled in Florida. The firm is notice-filed in Florida and Texas. Information on this web site is directed toward US residents only.

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