Executive Summary
With the flurry of activity and attention surrounding the Department of Labor's fiduciary rule and whether it will be delayed or not, there has been a dramatic increase in media coverage around what it means to be a fiduciary, and a push for consumers to seek out RIAs over those who work at broker-dealers. Despite the fact that most advisors, at both RIAs and broker-dealers, are trying to do the right thing for their clients.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why being a fiduciary matters, and why Series 7 licensees technically CAN'T be full fiduciaries to their clients without the DoL fiduciary rule.
The key issue is that the Series 7 exam is technically the "General Securities Representative Examination". This name is important, because it indicates that ultimately, the licensee is acting as a representative of the broker-dealer. In other words, a Series 7 license allows an individual to represent the broker-dealer in the sale of securities products to clients. This is why Series 7 licensees are referred to as "Registered Representatives" of a particular broker-dealer.
And as a representative of the broker-dealer, the broker technically has an obligation to serve the broker-dealer, not the client. This is why a broker-dealer can terminate a broker for outside business activity, or for soliciting a client to move with them to a new broker-dealer. In fact, technically the client isn't even a client of the broker's; it's a client of the broker-dealer's, and the broker is just the sales representative. That's why it's illegal for the broker to take any client information when changing broker-dealers!
Of course, in today's environment, the overwhelming majority of those working at a broker-dealer are dual-registered as a sales rep under the broker-dealer and working under a corporate RIA. Nonetheless, anytime the broker sells a product and earns a commission (i.e., using the Series 7 license), the broker is not a fiduciary, but a sales representative! Notably, these advisors are fiduciaries when they give under the RIA and are paid an advisory fee. But they are still effectively wearing two hats, and cannot be full fiduciaries while the Series 7 hat is on!
And the reason all this matters is because, if someone wants to take money from their clients by selling high-commission products to anyone they can, the suitability standard that applies to brokers is a relatively low caveat-emptor bar. But a fiduciary standard doesn't legally permit such behavior. That's why it matters - it's not about the already-good advisors who are doing the right thing, but about raising the bar to reduce the risk of bad brokers who try to do the worst they (legally) can. Which is why the focus on fiduciaries vs non-fiduciaries has morphed into a discussion of RIAs vs broker-dealers. Because the "easiest" way for the media to recommend avoiding a bad non-fiduciary (broker) is simply to recommend avoiding all of them.
The bottom line, though, is to recognize that Series 7 licensees are legally sales representatives. And if you don't like being treated as a salesperson, (re-)consider how your business is structured! Although ironically, if the DoL fiduciary rule does not get delayed, it may all soon be a moot point - as everyone working with retirement investors will be subject to the same fiduciary duty, regardless of their current business model! Ultimately, though, until brokers either voluntarily move to a new business model or are held to new DoL fiduciary standards, the reality will remain that you can't be a full fiduciary with a Series 7 license!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
With the flurry of activity surrounding Department of Labor's fiduciary rule and whether it will be delayed or not, there's been a huge increase in media coverage around what it means to be a fiduciary in the first place and why it matters for consumers. And as a result, more and more consumers seem to actually be asking questions about whether the person they work with is a fiduciary or not, which in today's market, favors the RIA channel, and puts growing pressure on those who work in insurance companies and broker-dealers.
In that context, I want to kick off this week's "Office Hours" with a recent question that came to me from an advisor friend who built his practice under...let's just say, a "well-known independent broker-dealer". We'll call him "Jim". So Jim sent me this message recently, and it said:
"Michael, I built my practice by doing the right things for my client from day one, and I've always acted as a fiduciary to my clients. It's just good business. Why do we have to make this about RIAs versus broker-dealers, instead of just talking about who's doing the right thing for their clients?"
Amen, Jim. Great question. I'm seeing this discussion come up more and more lately, particularly from those who work under a broker-dealer and really do try to give advice in the best interests of their clients, and maybe only use commission-based products when it's genuinely prudent to do so because it's actually what the client needs.
But here is the challenge and why it matters... because from the legal perspective, the nature of the relationship with a client really is different when you're under a broker-dealer versus an RIA. I know we like to all call ourselves "advisors", regardless of which channel we work in, but the reality is that, technically, you can't actually be a fiduciary to a client based on a Series 7 license.
Why A Series 7 Licensee Can’t Be A Fiduciary [Time - 1:46]
I realize that's a strong statement to make – that you can't be a fiduciary to a client based on a Series 7 license – so let me explain further.
The Series 7 exam, which is what almost everyone in today's world takes when they're going to work under a broker-dealer, is actually just a shortened label. The full name for the Series 7 exam is the "General Securities Representative Examination".
Now, the "general securities" part means the licensing exam pertains to any and all "general" types of investment securities. By contrast, the Series 6 exam is a "mutual funds and variable products securities representative". But the Series 7 is a General Securities Representative exam. Thus, the Series 7 licenses you to sell mutual funds and variable annuities, but also stocks and corporate bonds, annuities, direct participation programs, etc.
But it's the second part of the Series 7 exam title that matters here. It's the General Securities Representative Exam. Representative of what? Representative of the broker-dealer. In other words, when you take the Series 7 exam, quite literally, it's a license to allow you to represent the broker-dealer in the sale of its products.
That's why you have to be sponsored by a broker-dealer to take the exam, because you can't, working directly as an independent advisor with a client, sit for the Series 7 exam. You're a representative of the broker-dealer. They have to sponsor you to take the exam so you can become their rep!
Similarly, that's why you have to put on your business card, the footnote of your website, and any piece of paper you ever hand to the client, that disclaimer: "So-and-so is a registered representative of the Such-and-such broker-dealer". Because legally, you're not there to give advice to the client. In fact, it's not even actually your client. It's the broker's dealer's client, and you are a sales representative of the broker-dealer.
Now, I know that sounds harsh for some of you that are working in a broker-dealer. You may even be angry with me right now for calling you a sales rep. But please don't shoot the messenger. It's just the actual legal reality of how the laws are written.
In fact, the whole reason you're not subject to a fiduciary duty now as a Series 7 rep under the Investment Adviser's Act of 1940 is that the Adviser's Act has an exclusion that says if you work for a broker-dealer and your advice is solely incidental to the sale of brokerage products, you don't have to become an RIA.
So literally, the only way you avoid being an RIA under current law is that you have to not be in the business of giving advice and primarily be in the business of selling the products of your broker-dealer!
Brokers Are Obligated To Their Broker-Dealer Over Their Clients [Time - 4:30]
Here's why that matters from the perspective of this question being a fiduciary to your client... because when it's not your client – it's the broker dealer's client and you work as a sales rep for your broker dealer's products – legally, your duty is not to the client. It actually can't be. Your duty is to the broker-dealer that you represent.
That's why when you leave a broker-dealer, you can't take your client information with you. You can't take your client files. You can't take the financial plans. You can't even take a list of their account numbers. At best, the broker protocol only allows you to take basic names and contact information. And really, that's just because you can look it up online anyway at this point! It's barely private information!
Similarly, that's why even if you mention to your clients that you're planning to change broker-dealers, your broker-dealer can terminate you immediately with a U-5. It's not just because they're afraid you're going to leave and want to preemptively fire you. It's because soliciting clients for your new business while you're still a representative of their business is a breach of your employment contract with your broker-dealer. Because it's the broker dealer's client, and legally, you are a sales rep of the broker-dealer.
And that's why even under the Department of Labor's fiduciary proposal, as the broker, you would not actually be signing the Best Interest Contract with your client. The contract gets signed with the broker-dealer. Because, technically, the broker-dealer is the one with the client relationship, and the broker-dealer is the one that is going to be held to a fiduciary duty. Now, obviously if you work under a broker-dealer as their rep, if the BD has a fiduciary obligation, they will impose that expectation on you to also act as a fiduciary. But it's still subject to their oversight, because technically, you're still not the fiduciary. The broker-dealer is the fiduciary. You're the fiduciary's fiduciary rep!
Dual-Registered And Hybrid RIA Fiduciaries [Time - 6:15]
It's worth nothing that in today's environment, the overwhelming majority of those who work in a broker-dealer actually are dual-registered as a sales representative of their broker-dealer and work either under their corporate RIA or maybe a hybrid advisor with their own outside RIA.
In that case, you're effectively wearing two hats. One truly is a fiduciary under the RIA, and the other is as a sales rep for the broker-dealer. When you sell a product and generate an order commission, you're not an advisor or a fiduciary, you're a sales representative. When you separately give actual advice under the RIA and get paid an advisory fee, then you're actually operating as a fiduciary.
Although notably, even in the latter scenario, you're actually technically still a rep. You're an investment advisor representative, or IAR, of the corporate RIA, but that actually still means it's not your client. You must honor your employment contract with your RIA, first and foremost. But since the RIA is held to a fiduciary duty and they want you as their rep to honor that, they'll be held accountable, so you're held accountable as a fiduciary under their supervision.
Why Being A Fiduciary Is Different Than Just Acting Like One [Time - 7:11]
But here is the key point, in the context of the earlier conversation about why trying to do the right thing for your client and acting as a fiduciary is different than whether you legally are one...
It's pretty universal that trying to do the right thing for your client is good for business in the long run. And I know most advisors do this. I meet thousands of advisors at broker-dealers when I speak at their national conferences, and I know that most of us in the industry - regardless of RIA or broker-dealer channel - are really trying to do the right thing for our clients. And not because we're legally obligated to, but simply because we took this job to help people, and it's good for business to truly try to help them and serve their interests.
But the legal reality is still that you're not a fiduciary, and you can't be a fiduciary that puts your clients' interests first in all situations, because you still have a primary legal obligation to represent your broker-dealer and their interests instead. And the very fact that you're operating under a Series 6 or Series 7 license, which again, literally are sales representative examinations - it has "rep" in the title - precludes your ability to fully act as a fiduciary for clients.
You may still be doing the right thing for your clients, regardless of all of this legal stuff, and say it's a moot point. But the problem is still that you're not obligated to, or maybe it's more accurate to say, "The other brokers in your firm are not obligated to," and this is why the media picks on it. Because the only thing the other reps in your firm are obligated to do is provide their disclosure information to every client, and affirm basic suitability before they sell the highest-commission product they possibly can. And it's legal because it was a product sale, not advice, so it's caveat emptor and not subject to the fiduciary duty.
Think of it from the other perspective. Imagine you're a bad advisor...or you're not even an advisor. You're an evil sales dude whose goal is to get as many clients as possible to part with as much of their money as you can.
Basically, you have three choices: number one, steal their money; number two, sell products that pay giant commissions; number three, get paid a 1% advisory fee. Now, number one, stealing, it is outright illegal in any world, so not a very appealing option to risk jail time. Number three, getting paid a 1% advisory fee, is a really slow way to take your client's money, and not really helpful if you're trying to do bad things. But number two... overwhelm people with disclosures, make your complex sales pitch, get them to say yes once in a moment of weakness and then they can't take it back because there are surrender charges, and you can take 10% of the net worth of everyone you meet! That's a pretty sweet opportunity.
And that's why the fiduciary duty matters. It's not about trying to force you, the broker who is already trying to do the right thing, to do the right thing. It's to screen out the people who might be posing as advisors but truly are just trying to sell the crappiest high-commission product they legally can.
In other words, fiduciary is about raising the minimum bar on what the worst person in your organization might do if they wanted to be nefarious. Because again, as a Series 7 rep, you have no obligation to be a fiduciary. It might be good long-term business to do the right thing. But unfortunately, it's also a pretty good short-term business to sell the crap out of the highest-commission product you can find, and cash out, and move on later to another business if you have to.
So as long as that tension exists - as long as there are sales reps at broker-dealers who are only required to fulfill their minimal obligations to their broker-dealer as a sale rep and have no obligations to the client and are subject to lower standards - the fiduciary standard will continue to be an issue. And especially as long as sales reps continue to hold out to the public as advisors, because now the public can't actually tell who's a sales rep and who's a fiduciary.
Except, the public actually can identify the difference between a sale rep and a fiduciary, which the media now has picked up on... because sales reps, by definition, work at broker-dealers, and fiduciaries work under an RIA. That's why you're seeing this dynamic emerge where what started out as fiduciary versus suitability is now morphing into advisors versus sales people and RIAs versus broker-dealers.
How DoL Fiduciary Equalizes Broker-Dealers And RIAs [Time - 7:11]
But the bottom line, getting back to Jim's question, is that if you don't like this environment and being called a sales person and dealing with the scrutiny on you, frankly, I'd ask you to consider how you're structured and whether you want to change it. Because as long as you choose to operate under a Series 7 license as a sales rep of a broker-dealer, you are legally a sales rep. That's the job and its legal status. That's why you have a duty to your broker-dealer. That's why they can fire you for breaching it. That's why you can't take your clients when you leave. That's certainly why you can't sell the business and the clients in it the way that you can with an RIA.
Which means if you actually want to operate as an advisor and hold out that way and not be a sales rep, you need to be affiliated with an RIA. That's just the legal reality of how the rules are structured.
Now, ironically, if the fiduciary rule does not get delayed and actually goes through, then suddenly everyone, regardless of whether they're at a broker-dealer or an RIA, actually becomes subject to the same fiduciary duty. It doesn't matter whether the client engages through a BD or an RIA. And then this whole fiduciary discussion, and even much of the discussion about RIAs versus broker-dealers will become a moot point.
So if you're frustrated with the current fiduciary discussion, and you're in a broker-dealer environment, you should actually be hoping the fiduciary rule goes through from the Department of Labor! Because it levels the playing field. It takes the fiduciary question off the plate as a potential objection or concern, because now broker-dealers can be held to a similar fiduciary duty as the RIA, and so fiduciary would no longer be a differentiating discussion. At least pertaining to retirement investors, as that's the limited scope of the DOL's rule.
In the meantime, I hope that provides some food for thought around fiduciary versus suitability, and why we're seeing this morph into an RIA versus broker-dealer discussion. This is "Office Hours" with Michael Kitces, 1 p.m. East Coast time on Tuesdays. Thanks for joining us and have a great day everyone!
So what do you think? Can someone with a Series 7 be a fiduciary? Have you noticed the dialogue around fiduciary versus suitability shifting? Does actually being a fiduciary matter more than just acting like one? Please share your thoughts in the comments below!
That’s one reason that drove me away from the B/D world into becoming a fixed-fee RIA without any product sales. By their legal nature, the relationships are not beneficial to the client.
I’ll point out that the same is true for anyone holding a Group 1 insurance license. When you sell insurance, you are legally an “agent” for the insurance company. That means they are paying you to represent their interests. That does NOT necessarily mean that agents do wrong by their clients (I agree with you that good people dominate the industry), but they are legally handcuffed if push comes to shove.
I found that it’s so much easier to focus on my clients now that I don’t have the external “noise” created by a third party in the relationship. No sales contests to ignore, no “production requirements”, no “weighted” credit for selling the B/D’s own products. I always did the right thing by my clients in that environment; it’s just so much easier and cleaner without it.
Elliott Weir
III Financial
Michael, I really respect and admire you, I agree with almost everything you publish. I do feel that sometimes you you miss some things. First off many independent broker dealers do allow you to keep all your information. So there should be a distinction between those broker dealers that do not sell their firms products.
Although I do believe the RIA channel is the way to go, sadly we are in a state where products have not changed. As a Legal Fiduciary I can’t do as good a job for my clients ALL the time.
I actually wish I could opt in as a fiduciary on all my business, certify myself as such even with commissions. Sometimes that is just the way products are sold. I believe nobody can serve my clients better than I can.
I do hope product manufacturers eliminate upfront commissions on products. If you are getting a 1% trail verse a 1% advisory fee why should there be any difference? And we really can’t ignore reverse churning.
My thoughts exactly.
Andrew,
Fortunately, DoL fiduciary actually IS starting to drive product change on this. I had predicted it as a soon-to-emerge trend last year, shortly after the final DoL fiduciary rule came out, particularly regards to annuity products – see https://www.kitces.com/blog/why-dol-fiduciary-wont-kill-annuities-it-will-make-them-stronger/. And sure enough, in the months since then, numerous carriers have announced fee-based annuities available directly to RIAs. A number of insurance companies are working on similar no-commission insurance product offerings that RIAs could help implement (e.g., see Mass Mutual’s “Haven Life” initiative).
That aside, I would note that there’s STILL a fundamental conflict of interest bias to implement insurance products for commissions in the first place. That’s why we have the debate in the first place. After all, CLEARLY good fiduciary financial advice also involves getting your estate planning documents in place, but no one says the advisor is failing their fiduciary duty for referring out to an attorney and not drafting documents internally. Effective tax advice and tax preparation is a major issue of good financial advice, but most firms refer out that tax work to CPAs, and don’t do it internally. Clients should obviously have proper homeowners and automobile insurance, but we don’t do THAT internally for clinets. So why are we SO stressed about the idea that we “must” do the life insurance implementation hands-on, rather than referring it out to dedicated insurance experts, when it’s “ok” to refer out the legal work, the tax work, the homeowners and automobile insurance, etc.?
But again, as rules like DoL fiduciary permeate and the regulatory landscape shifts, I expect we’ll see a proliferation of no-load insurance/annuity solutions for the RIA channel, which will make this less of a challenge in the first place. Thank goodness. 🙂
– Michael
Michael,
The issue is that some of these, such as Great Americans Fixed-Indexed annuity perform better on a commission basis, so yes these products are getting better, but they are not the best. And although I agree there will be progress I can’t see it for a long time.
You do a lot to highlight the bias of commissions, and I give credit for highlighting AUM conflict as well.
I think it is ok to refer out work that you believe someone can do a better job, I am not licensed to be an attorney. I do not do taxes, and although I am licensed to do auto/home insurance I refer out to experts who all know better then me. And as it regards insurance, I am the expert.
You highlighted the person running the lifestyle practice earlier. My first thought is I could never be like him, why would he take so much time off, why isn’t he always researching what is best for his clients. I’m not saying he is doing something wrong. If I want to chose to not take 80 days off a year and make sure my knowledge is impeccable that should be ok too.
Without sounding to cocky, I rarely if ever know someone who knows life/d.i./ltc like I do. However I do not want to solely focus on that. Why can’t I be an expert on a few things.
I understand I may be different than others, and I get where you come from. But unless every product can be sold through an RIA I can’t see doing it. Also being a fiduciary doesn’t matter if nobody takes cases against RIAs. Plenty of bad actors on both sides.
I would argue we don’t need more financial planners. We need less, and we need them more educated and focused on planning and not sales people.
Michael,
Would you then make the case that anybody working for a B/D cannot be a CFP professional? CFP board requires a fiduciary duty, but the B/D requires duty to them.
Never worked at a B/D myself, just curious your take on this.
Michael,
This has long been a point of contention around the CFP marks and their use within the broker-dealer channel. In point of fact, there were a few firms that banned the use of the CFP marks in their firm when they adopted a fiduciary standard in 2008 – for instance, see https://www.kitces.com/blog/state-farm-backs-away-from-cfp-designation/
I’m hoping we can find a better resolution to this when the CFP Board updates its Practice Standards later this year!
– Michael
Honestly, I can’t see them changing much in regards to this. Simply too much money coming in from partnerships with Fidelity, Northwestern Mutual, etc. Suggesting that their employees can’t be CFP professionals isn’t going to endear the Board to these donors.
Don’t underestimate how much these firms are changing.
The same was said of Merrill Lynch. Then they pivoted to be full level fee fiduciaries for retirement accounts under DoL fiduciary.
Schwab is hiring full DoL level fee fiduciary CFPs for Schwab Intelligent Advisory. Vanguard has picked up over 400 CFPs in the past 2 years for Vanguard Personal Advisor.
A lot of major firms are pivoting to full fiduciary models, and hiring CFPs to deliver it. 🙂
– Michael
I think the follow-up to this should be an examination of whether you can be a fiduciary and offer insurance solutions if you’re purely under a Series 65/CFP® RIA model (with an additional insurance license). It’s a tougher question than if you’re just holding a Series 7.
Victor
Victor, I don’t think you can legally act as a fiduciary when selling insurance. By definition, to sell a company’s insurance product you have to register as an agent with them. As an agent, you are obligated to represent the insurance company’s interests, not the client. Certainly, most people selling insurance (I used to be one) can do both, but by the letter of the law it’s a conflict.
It was one I never liked, especially as a CFP(R) expected to act as a fiduciary.
Elliott Weir
III Financial
I’m not debating it for debate’s sake, but it’s not that clear cut. With the Series 7, you have only one obligation, which is to the B/D. When you are an RIA (pure RIA), you are under a fiduciary obligation to the client. That obligation doesn’t cease because you have a concurrent obligation to the insurance company. If you’re doing this independently (as opposed to as embedded insurance agent), you may have multiple contracts with multiple companies. Surely there’s no obligation to prefer one company over another, right? Those obligations exist all at the same time. It follows then that while even if it’s conflict, it’s conflict that resolves in favor of acting as a fiduciary. The way you meet both obligations is meeting the higher obligation of best interests of the client, which simultaneously meets the obligation to act correctly as an appointed agent of the insurance company. Said another way, I don’t know of a single RIA that requires a client to sign a conflict waiver when they sell insurance. Ask a guy like Jeff Rose if he’s acting as a fiduciary in all respects (even when he recommends insurance).
I agree, it’s definitely not clear cut, and I think part of the reason for that is that the conflict hasn’t been tested in court (to my knowledge).
The RIA rules say fiduciary. The contract with the insurance company says, “you are an agent representing us”. Even with multiple contracts, once you select Company A’s product, in the act of selling it to the client, you legally represent Company A.
I’m not sure what a court would say if someone sued and said, “they claimed fiduciary because of the RIA but they acted in the best interests of the insurance company”. Who wins the rock-paper-scissors? 🙂
Elliott, I think you and I both wear white hats (your website looks great), so I hope you take this for the conversation that it is and nothing positional.
My personal circumstances get even more complicated because I’m also a practicing attorney. So, I start as a fiduciary and I don’t ever get away from that. I would never succeed in a claim where I tried to assert that my clients stopped thinking of me as their lawyer (and thus working in their best interests).
As to more food for thought, I thought the concept of separating it out by “product sales” vs. “non-product sales” gets even sillier. If someone charges AUM (and I see that you don’t), isn’t there a conflict against giving advice that shrinks the size of the account? Why wouldn’t the product that being sold be “an investment portfolio” and thus you can’t be a fiduciary if you’re tainted by interest (UNREGULATED!) in keeping a portfolio a certain size.
I think the best part is that there are so many bad actors out there, that this debate is purely academic. Working in your client’s best interests will be a competitive advantage for a long-time. Thanks for the conversation – VJM
Victor, I’m enjoying the discussion so far and am not taking anything personal from it. 🙂 And thanks for the compliment on the website…I just re-launched it last week to really zero in on my desired clients and their needs (you’re an attorney, I’m a recovering tech geek so I wrote and designed the site myself).
You certainly do have a lot of hats if you’re an attorney as well!
I agree that this whole area is mostly academic until the courts get involved. You can create scenarios that create conflict with ALL compensation models (even mine). It’s impossible to be “conflict-free”. My comments reflect my understanding of the legal aspects, since Michael’s original post focused on the legal conflict between Series 7 B/D affiliation and fiduciary.
Part of the reason I dropped my licenses and operate purely as a fixed-fee CFP is that I have zero other parties involved in my client relationship. It’s a personal preference.
BTW, I’ve been debating Bob Clark from ThinkAdvisor for a long time – he enjoys writing posts and articles about why AUM is better than fixed fee. (our latest trade was posted yesterday and he started off referencing me again, and I commented below his post): http://www.thinkadvisor.com/2017/02/15/the-dead-horse-bounce-and-another-thing-about-flat
Victor,
All good points. But just to make it crystal clear. Being a fiduciary doesn’t preclude one from acting when there exists a conflict of interest. It just means that you do so at your peril, because the client can obtain damages (maybe even punitive damages) if the client is injured as a result of the conflict. (No harm, no foul.) So, using your example, if an RIA explicitly recommended to a client that she not pay off her mortgage (so the RIA could continue to earn AUM fees) and the portfolio lost significant value and the mortgage got foreclosed – the RIA could be exposed to legal liability for the conflicted advice.
A registered rep in a similar circumstance – say she sold a $300,000 variable annuity to a customer sitting with $300,000 in cash and also with a $300,000 home mortgage – would have an easier defense (assuming there were no misrepresentations) – because there is no fiduciary relationship.
Elliott,
Bear in mind that the fiduciary duty of an RIA is still limited to the scope of delivering INVESTMENT insurance. Not all financial advice.
So basically, the mere fact of being an RIA itself doesn’t actually say anything about a fiduciary obligation for insurance implementation, one way or another. That’s why the insurance relationship itself gets disclosed in the ADV as an outside/separate business activity (and not a service provided under the scope of the RIA itself).
From a broader perspective, this is the problem with trying to regulate “advice” based on product channels, instead of more efficient regulation that actually oversees the ADVICE. :/
– Michael
Michael,
Most states have agency laws that are what give rise to an additional fiduciary duty. They are duties that layer on top of the federal fiduciary obligation for giving investment advice. You can affirmatively elect them in the contract, or they can be imposed if you meet the state test for agency. Those fiduciary obligations deal with duties of loyalty and duties of care.
But, the point is that most state case law on the subject impose that fiduciary obligation regardless of whether you have other obligations at the same time. I.e., you can have an obligation to the insurance company, but it doesn’t terminate your fiduciary obligation to the client if you’re under the state agency laws for fiduciary conduct.
So, with respect, there is more nuance to an RIA offering insurance and whether that can be done as fiduciary – it’s not as simple as saying “RIA = fiduciary for investments, but not for insurance.”
Victor
Elliot,
I am RIA and also sell insurance. So many times I have seen clients hired a fee only CFP before me paid the 1000 to 3000 fee and the CFP recommended to get term life insurance and disability insurance. Now the fee only advisor I am sure would claimed that they full filled their fiduciary duty by putting these recommendations in writing and having the client initial next to them. Somehow when I meet these clients 5 years later, they have the plan the fee only CFP prepared and still no insurance. Now my process as a RIA is different. I disclose that I get paid commissions and I won’t charge them a planning fee for insurance and then charge commissions. Frankly as a RIA, I don’t care where my clients get their insurance, most of them end up getting it from me. And yes, I shop term policies around. Just like the agent conflict you mentioned, I also have to worry about every ETF that I recommend as none of the investment companies are fiduciaries to my client. Any ETF can jack up their expense or change methodology behind my back anytime. My job is to find the best product for my clients and continously monitor them.. Now the end result is that my clients have much higher chance of having adequate life insurance and disability coverage than clients working with a fee only CFP.
Tunc, I’m not trying to disparage the various compensation models here – I know there are myriad ways to operate. I’m talking about from a *legal* perspective.
It’s my understanding that it’s a legally murky area because (and I used to have to do this when I sold insurance) you have to wear “two hats” – one hat when you’re selling insurance/investments and the other when you are doing fiduciary planning. My prior firm went so far as to limit planning engagements only to the creation (or updating) of a plan (no ongoing). This way that relationship terminated and I could sell them the product(s) needed to implement because of my legal obligation to the insurance company/companies used.
BTW, I’m an RIA but don’t sell insurance (I’m fixed fee). I see to it that my recommendations get implemented, by working with (or introducing to) a licensed insurance agent. The lack of implementation reflects on the planner, not the compensation (just as it does w/insurance sales).
Elliott,
To the extent someone is actually appointed as an insurance agent, you’re correct the obligation is to the insurance company and not the client. Akin to being a registered (sales) rep of a broker-dealer, you’re an insurance AGENT. That’s agent of the insurer. Not the client. So yes, it is a comparable concern here, to the extent you’re actually facilitating the sale.
– Michael
Regarding whether the DOL rule levels the playing field, that’s only accurate as to retirement account. B/D agents are free to put their interests about their clients’ with taxable investment accounts.
I understand that the Series 7 laws are written to say that brokers cannot legally take the clients from the broker dealers, but the laws should be changed. The reality is that the clients wouldn’t exist at the broker dealer if it weren’t for the broker. I find it absolutely ludicrous that the laws are written to say that the clients (generated by the broker) cannot be taken from the broker dealer.
Having spent my entire career (8 years now) in the fee-only RIA world, I have long been perplexed by how the BD world operates. This video helped me understand it a bit more, so thank you!
I agree that this video certainly helps me understand the difference so much better. Being on the admin side for several years and now working from just a marketing perspective in the advisory world this helps me understand the concept and difference so much better. As always, thanks for the great info @Michael_Kitces:disqus!
As a CFP who is Dually Registered with an Independent RIA and a Small Broker Dealer I am confident that I am doing the right things for my clients. Most of my clients are on an AUM Fee or a Flat Rate with me depending on the clients level of engagement and needs. The reason I maintain my Series 7 and BD relationship is because there are still clients that own VAs that someone sold them (maybe even myself when I first got into the industry) that actually have Great riders, riders that are no longer available to clients today and insurance companies are actually trying to buy clients out on a regular basis because they realize they will be marginal at best making a profit on these products. It actually make sense for the clients to own them based on their risk tolerance and needs. If I give up those client,s by dropping my series 7 BD relationship, the insurance company is still contractually obligated to charge the internal expenses on those products and either payout the income (slang industry word trailing commission) or retain the profit for the house accounts which they would be if I dropped my license. I actually pay a BD, buy additional E/O insurance and go through a whole bunch of additional compliance so that I can continue to service these clients and they don’t end up in a black hole. Sure I could set it up so I have access to the accounts and have a Power of Attorney for the client but should I then charge the client an additional fee to do this? Of course not, the best thing I can do for these clients is maintain my license and service the clients, yes I get paid and the clients expect that I get paid as I am their contact person, they do not have to wait on hold internationally for extended periods of time to be re-routed multiple times to ask questions.
This whole industry is so focused on legalese when it should be only about the client. A good advisor will help a client become financially independent and not forced to live on Ramen Noodles, whether or not that’s a fiduciary that is besides the point.
We have a retirement crisis in this country, so their will be a lot of retires soon on a steady diet of Ramen, and unfortunately there are a lot of people who are dramatically under prepared for the long life after a full time job who will be lining up to sue people when they run out of money because they didn’t save enough or life gave them a set of cards that is less bountiful financially, this is unfortunate.
Lawyers make too much money on Fiduciary Battles, look at the astronomical amounts big firms like Ameriprise and Bank of America are putting into this ruling. At the end of the day I am all for getting bad apples out of the industry, but lets be realistic their are many ways to take care of a client. If the client agrees to a fair practice and they get good service from an advisor there should be no issues. If you are a 1% advisor or a Flat Rate Retainer advisor you still have to make a living and provide value to clients to make that living. If you charge $200 a month to a client who has $100,000 in assets you just charged him 2% for 5 years that’s 10% of his investable net worth. Is the guy who put him into American Funds wrong for what he is doing? Of course not, he helped the client realize that over the long term there is a premium to investing in Stocks, Bonds vs sitting in cash. The media should be educating clients on savings appropriately 20-25% of Pre-Tax Incomes so prepare people for retirement and rainy days.
This is a great business if we are able to help people. The media is not helping people by talking about words that most reporters don’t even understand. The Government is not helping people with complex tax codes and regulations. Teach people how to budget and they will feed themselves, talk about words and the taxpayers will be feeding the world.
How the advisor gets paid is absurd if you ask me and an AUM rate is usually more expensive in the long run then the Series 7 Advisor that only sells American Funds which if held for the long term are one of the few investment management firms that have outperformed benchmarks for the long term 10+years.
great words of advice….thank you @jan.attard
Wow. Michael. This is deep. Sometimes I think people overthink this stuff. I am confident that few, if any, clients think this way. Plus it seems like twisted, ironic logic that a licensed advisor is somehow not beholden to their client when they are also an RIA, yet an unlicensed RIA is.
I like your work and respect your opinions but this time I disagree. I think the RIA status and fiduciary obligations that implies overrules the Series 7 and broker-dealer – much like how a doctor has ethical and legal rules that override his obligations to the HMO or hospital that employs him.
Mike,
Bear in mind that ethics and legal obligations are not always the same. Of course, ideally they should be aligned. But again, when some legally commitments themselves to be a representative of a broker-dealer, you risk tying your own hands when a broker-dealer/client conflict arise. :/
The fact that the broker-dealer community started calling their brokers “advisors”, when legally they’re still registered and licensed as brokers, has clearly confused the matter for all involved (the clients AND the actual advisors who work there). :/
– Michael
One simple way to think of this. Suppose a dually registered advisor thinks the best thing for the client is to charge a fee (initial and then ongoing – via a retainer, subscription or hourly) and for the client to open an account at Vangaurd and self direct their investments with coaching from the advisor. Since most b/d’s prohibit selling away, this would be impossible.
Michael,
Can you briefly tie in how Securities Licenses (7/66 vs. 65) would make an impact in this conversation, if at all?
Michael, I thank you for your expertise and wisdom.
My questions:
1). In todays challenging environment,… is going with an established RIA with an exceptional mission statement similar to Buckingham (holistic wealth management) or a strong Insurance Company such as Mass Mutual Brokerage Firm better than the independent route.
2). As Fiduciary, is the “duty of care” to the client to obtain the CFP and or other certifications if one decides to go it alone as RIA(?)
I appreciate your opinions, support and encouragement. I stepped away for a couple years to focus on saving infants lives and mothers lives. Though I have retained my RIA, always health care has remained my focus. I wish even in this environment to return to the education of clients (nurses, physicians, attorneys, CPA’s ) to become Financially Independent, My role is caregiver and professor. My financial background UBS, Boutique Trading Firm, ETG trading group, CMT courses, Golden Gate University.
I need training, education so that i am applicable, suitable, unambiguous and clear to benefit all clients who would trust. I am independent via IBKR.
I did possess Series 7, 63 and 65 while at UBS.
I took and did not pass 24. I have Ins. License, MBA and 1 year law.
I will obtain CFP or complete Law Degree or Psychology Degree.
The goal to keep learning, keep growing to benefit me and my clients.
(should you wish to be part of my financial education blog send email).
I would love to utilize some of your posts ….
Thanks for any and all advice.
Carpe Diem!
Stay Safe.
Jan
http://www.jolivermaxwell.com
[email protected]
@jan.attard