Financial Services Trick or Treat

A Trojan horse.  A wolf in sheep’s clothing.  Whether the former is referring to the Greek military ploy in the Trojan War or a computer virus and whether the latter is rightly linked to biblical passages or wrongly credited to Aesop, the same mental image is evoked – a diabolical imposter masquerading as something else to gain your confidence and then unleashing its harm.
On this Halloween day when the more intrepid among costume ourselves under the ruse that others will think we are something we are not, it seems appropriate to write about the Trojan horses of financial services – brokers who are also licensed as registered investment advisors, called “dual registrants” in the industry.
But first a little history about how we got to where we are today.  Over two decades ago a bold and daring group of registered investment advisors (RIAs) known as the National Association of Personal Financial Advisors (NAPFA) obtained a trademark on the term “Fee Only” as it relates to the delivery of financial advice.  The purpose was simple.  Most deliverers of financial “advice” in the marketplace were receiving commissions from the products they “advised” clients to purchase.  NAPFA was trying to help the public understand that there was a different model for delivering financial advice – one in which the advisor receives only a fully disclosed professional fee for his/her advice and stands apart from the conflicts of interest inherent in a situation where the “advisor” receives financial benefits from the products he/she recommends for purchase.
The original response of the brokerage community was to argue that a financial advisory practice which was based solely on a fee-for-service model could not be economically successful in an attempt to persuade professionals not to pursue this model.  But as successful practices began emerging – and the benefit to the consumer of objective advice that was motivated only by their best interest began to resonate – another response needed to be developed to avoid all but the most die-hard do-it-yourself investors flocking to this model.
This ushered in the era of confusion.  The goal?  If the message is too powerful on its own merits, confuse the public so no one except the most dogmatic can really figure out what is going on.  So for example, in the “good old days” there were 3 types of shares of a mutual fund: front load, back load and no load.  Brokers used the others but fee-only advisors used only the no-load funds because you could get the same investment without paying a commission.  What happened?  Fund companies developed multiple no-load “classes” of shares of the funds, some of which replaced the up front or back-end commissions of front load and back load funds with large annual payouts from the fund to the broker.  The result?  The broker could tell his/her client that they were receiving a “no load” class of share of the fund, but yet the broker’s compensation would remain similar to the commissioned class of share because of the large payout.  You, the investor, can now get a “no load” fund from both a broker and a fee-only advisor.  Is there a difference in what you get?  Yes.  But unless you dig far enough into it, you don’t realize that.  So on its face it looks like there is no difference between what you get from a broker and a fee-only advisor.
Another example: the development of so-called “fee-based” services.  With these services, brokers charge you a fee similar to the fee you would pay a fee-only advisor.  Is there a difference in what you get?  Yes.  In the case of a fee-only advisor, the fee you pay is their only compensation.  In the case of a “fee-based” “advisor”, they collect commissions and other compensation in addition to the fee you pay.  A big difference.  But again, unless you dig into it, you don’t appreciate the difference and on its face it looks like the same service.
If these “fee-based” “advisors” or peddlers of high internal fee “no-load” mutual funds were recognized as dressing in Halloween costumes as fee-only advisors, maybe you would be on your guard.  But since they instead are outfitted as a fee-only “horse trophy” or “sheep”, you should be wary. But read on.
Trying to figure out how to clear the confusion that was effectively created by the above developments, NAPFA decided about 5 years ago to undertake an effort to describe the nature of the optimal client-financial advisor relationship apart from a discussion of compensation.  This led to NAPFA’s “Focus on Fiduciary” campaign which endeavored to explain what the word fiduciary means, what a fiduciary as a financial advisor does and why that kind of relationship is best for consumers who recognize that they don’t really know what they are doing and who are looking for objective advice that will guide them to decisions that are motivated only by their best interests.
This campaign, too, was successful.  In fact, so successful that it rightfully receives part of the credit for a proposal from the Obama administration that EVERY financial professional who held themselves out as an “advisor” should be held to a fiduciary standard.  If that proposal were enacted, it would go a long way toward clarifying the confusion in the public mind over whether they need to “have their hand on their wallet” when they are receiving “advice” from a financial advisor.  But unfortunately the strength of the lobbying effort opposing this – and thereby tacitly supporting a continued state of public confusion – has successfully prevented enactment of this proposal to this point.
Which brings us to the latest financial Trojan horse.  There are, of course, a large and growing number of fee-only financial advisors providing fiduciary advice.  But to counteract the power of that message, many brokerage firms have now created an affiliated RIA.  They claim the RIA – like fee-only financial advisors – provides advice from a fiduciary perspective.  Their professionals are licensed both to sell products in the brokerage firm and to render supposedly “fiduciary” advice for the RIA; the proverbial “dual registrant”.  Again confusing the public mind so it appears that the services of a fiduciary, fee-only advisor are the same as the services from a dual registrant although they are not.
Perhaps if there were some wall between the operations of a dual registrant such that the RIA could not recommend any investment to its clients that would benefit the brokerage side of the firm or the individual “advisor” in any way, the arrangement would be less problematic.  But I do not understand how a professional, working in the RIA arm (today, anyway) of a dual registrant, can sell or recommend investment products that benefit the brokerage side of the firm and still claim they are acting in a “fiduciary” capacity.  If you asked them, they would acknowledge there is a conflict of interest in this arrangement.  But they would say you can’t completely avoid all conflicts of interest in a fiduciary relationship, so as long as those conflicts are disclosed they are okay.  I say there are minor, minimal conflicts of interest and there are abundant conflicts of interest.  Similar to the fact that all of our states – except maybe Hawaii – get snow.  If you want to avoid snow as much as possible, you wouldn’t choose to live in Wisconsin.  You’d live in Florida.  Or Texas.  Or Arizona.  And although you can’t completely avoid conflicts of interest, it you want to minimize them, you should stay away from…… you get my drift (so to speak!)
At the end of the day, it is terribly hard to help clients sort through the confusion so they can clearly understand when someone is truly just giving them advice guided solely by their best interest versus when someone is giving them “advice” which, at the end of the day, is motivated as much or more by the interests of the firm or the individual giving the advice as it is by the client’s best interest.  Some way that a consumer, with many other time commitments and not a great deal of time or interest to sort through all of these nuances, can easily recognize if they are really dealing with a “sheep” or with a “wolf in sheep’s clothing”.
Perhaps the best litmus test is this – does your financial “advisor” hold a securities brokerage license?  In the industry that would be a Series 7 or Series 6 brokerage license.  These licenses enable an “advisor” to sell investment products to you.  Fee-only, fiduciary advisors that do not sell products to you don’t need these licenses – so they don’t have them!  So if your advisor holds a Series 65 license (which is the license required to give advice on behalf of an RIA) and only a Series 65 license, you are dealing with someone who for sure does not receive compensation from investments they recommend to you.  But if the “advisor” holds Series 7 or 6 in addition to or to the exclusion of Series 65, be on your guard lest you meet the same fate with your investment future as the residents of the City of Troy experienced in the Trojan War.
Unlike the harmful results of the illusions discussed here, may the illusions you create with your costume this Halloween successfully obscure your identity – if only for the day!

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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