Yahoo Finance Report Says Ads Show Illusion of Fiduciary Duty
It's funny that there's even a "debate" over whether brokers should be required to act in the best interest of their clients. It's even more nonsensical that many investment advisors to retirement plans don't have this obligation. Much has been written on this subject. I have little to add, other than to marvel at the ability of the securities industry to maintain a position that has no merit for so long.
It's one thing to have a conflict of interest with your clients. It's quite another to mislead them about the nature of your legal commitment to them. A report for the Public Investors Arbitration Bar Association, released March 25 and authored by Joseph Peiffer and Christine Lazaro, makes the case that brokers are engaged in precisely this kind of deceptive practice.
Misleading advertisements. The report includes a lengthy sample of misleading advertising on the part of major brokerage firms:
Allstate: "You're in good hands."
UBS: "Until my client knows she comes first. Until I understand what drives her. And what slows her down. Until I know what makes her leap out of bed in the morning. And what keeps her awake at night. Until she understands that I'm always thinking about her investment. (Even if she isn't.) Not at the office. But at the opera. At a barbecue. In a traffic jam. Until her ambitions feel like my ambitions. Until then. We will not rest. UBS."
Merrill Lynch: "It's time for a financial strategy that puts your needs and priorities front and center."
Morgan Stanley: "Having an intimate knowledge of blue chips and small caps is important. But even more important is an intimate knowledge of you and your goals. Get connected to a Morgan Stanley Financial Advisor and get a more personalized plan for achieving success."
Anyone reading these advertisements would believe these brokers place the interests of their clients above their own, and perhaps even place great value on doing so. They would be mistaken.
Legal position of brokers. When brokers are sued for losses caused by misconduct, they repudiate the claims in their advertisements and assert they have no fiduciary obligation to act in the best interest of their clients. The report demonstrates this point with extracts from legal documents submitted by brokerage firms in arbitration proceedings:
Allstate: "Állstate Financial Services owed no fiduciary duty to Claimants, and, therefore, no such duty was breached."
UBS: "[A] broker does not owe a fiduciary duty to his customer in a non-discretionary account."
Merrill Lynch: "Respondents did not stand in a fiduciary relationship with Claimants."
Morgan Stanley: "Claimant's claim seeks to impose 'fiduciary' obligations and duties on Respondents that only arise in very limited circumstances that do not exist here, i.e. where Respondents are given discretionary trading authority over Claimant's accounts."
The report succinctly summarizes this disparity: "On one hand, the firms boast that they offer unconflicted, trustworthy advice while, on the other hand, those same firms argue they are little more than salesmen with a single duty: to execute trades in customers' accounts."
Why it matters. There's a big difference between dealing with a financial advisor who is fiduciary and one who is not. This analogy may help:
You go to a doctor who recommends a surgical procedure. If she is a fiduciary, she would have to recommend the best procedure available for you, whether or not she's the one to perform that particular surgery. If she isn't a fiduciary, she can recommend a "suitable" procedure, perhaps one she does perform and would be compensated for completing, even though it may not be optimal.
Brokers and insurance companies are fighting hard to avoid becoming fiduciaries. They are currently held to the lower "suitability" standard. This means they can recommend investment products that may not be the best option available to help you reach your financial goals, as long as they are "suitable."
A common example is the recommendation of proprietary mutual funds (which often bear the name of the brokerage firm). There are often similar, less expensive index funds or other mutual funds available with higher expected returns. A fiduciary couldn't recommend proprietary funds if they weren't the best option. A broker has no such constraints and can do so with impunity.
Brokers seem to advertise one standard of care, and then adhere to an entirely different one in legal proceedings. You have to wonder if this is legal. Legal or not, you have been warned. This may be the biggest deception of all. Don't fall for it.
Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."
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