In case you missed it, on September 7, APViewpoint hosted one of the best debates ever regarding the fiduciary standard and the DOL rule. It was notable because:
- Unlike most of what you’ve been reading, it covered both sides of the topic, and
- the debaters forced each other to provide deeper rationales for their beliefs.
You can watch a replay of the webinar here and view the post-webinar discussion here.
Congratulations to fiduciary skeptic and business coach Tom Hegna, and fiduciary advocate Knut Rostad, co-founder of the Institute for the Fiduciary Standard. They provided a rarity in our online world: a fair hearing on a complicated topic.
This is not to say either of the debaters gave much ground, however.
Rostad started the debate by telling the audience that the benefits of a fiduciary standard are as settled as the science that tells us that cigarette smoking is bad for your health. The presumption: sales are bad for consumers’ financial health – and of course he cited the White House Council of Economic Advisors report saying that qualified plan and IRA participants were being overcharged by an estimated $17 billion a year due to hidden fees and sales charges.
Hegna countered with a three-pronged argument.
First, he said the marketplace contains no shortage of fiduciary advisors, yet consumers are still choosing to take their business to brokers and insurance agents. Who is the government to prevent them from making this choice in the future? Hegna may not have helped his argument when he agreed that smoking is, indeed, terrible for public health, but hey, Americans are still allowed to light up in all 50 states, and also gorge themselves on unhealthy donuts and fast food. While we’re forcing sales professionals to act as fiduciaries, should we also ban smoking, fast food and donuts?
Second, Hegna asserted (without providing any evidence) that fiduciaries are uninterested in serving less wealthy Americans. He told the audience that 45% of Americans have no savings and 80% have less than one year’s income in their portfolio. Without a broker or agent to sell them a product, he said, these unfortunate citizens would get no advice at all.
Finally, Hegna rejected the argument that only fiduciaries do what’s best for their clients. In a later part of the debate, he expanded on this point, saying that millions of insurance agents act in a fiduciary capacity at all times when they recommended products. Meanwhile, there are plenty of sleazy or conflicted fiduciaries. Bernie Madoff, Hegna said, was a fiduciary.
Rostad missed a huge opportunity here, to ask: If insurance agents are already acting as fiduciaries, why are their professional and trade organizations fighting so hard to protect them from being held to that standard? Why not embrace it instead?
In the back-and-forth that followed, Rostad said that there’s absolutely nothing stopping salespeople from being salespeople under the DOL rule; they would be completely free to self-identify as salespeople and continue to sell products as they have in the past. And, countering the idea that fiduciaries won’t work with “average” Americans, he said that there are many fiduciary advisors who work on a flat retainer or hourly basis who would be delighted to work with any unwealthy clients that the insurance agents and brokers wanted to send their way. Meanwhile, why couldn’t those poor, orphaned “average” customers take their business to Vanguard?
Hegna said that many so-called fiduciaries are actually harming clients with conflicted advice. How? Many of them are recklessly ignoring the many benefits of guaranteed products in client portfolios, are not recommending LTC insurance or failing to use life insurance as the most favorable way to transfer assets to their heirs. Is that what Rostad calls putting the clients’ interests first?
And he argued, and Rostad surprisingly did not rebut, the idea that when an agent sells an annuity to a customer, the annuity company pays the commission, and the customer never has to pay for the sale of the product. (Do sales agents really believe that?)
There was a brief exchange which showed that Hegna didn’t really understand the legal requirements of a fiduciary standard, when he tried to argue that people could later sue if, with the benefit of hindsight, some other investment than the one the fiduciary had recommended turned out to provide higher returns. “If Bitcoin goes to $100,000, will people go back and say, you should have put your clients in that with the benefit of hindsight?” he asked.
Rostad could have been more pointed in his rebuttal on this point, but he did note that hindsight was not and never has been the standard by which fiduciary advice is measured. Otherwise, fiduciaries would be required to have working crystal balls.
Hegna said that FINRA already requires brokers to act in the best interests of clients. Rostad said that FINRA never actually enforces this requirement; it only pays lip service to it. Hegna said that the marketplace, not regulation, should decide who gets to buy and sell what, and anyway, the current system has been working just fine for 70 years. Why do we all of a sudden have to shake it up? If people don’t want to pay a fee, they can pay a commission for advice instead. If people didn’t want to buy equity-indexed annuities and non-traded REITs, they wouldn’t. Let the marketplace decide.
In his response, Rostad missed another opportunity: the best rebuttal is that many consumers don’t realize (and are not told about) the sales loads that salespeople are being paid to sell products which some fiduciary analysts believe are unlikely to deliver value above a well-managed portfolio of traditional index funds (TIFs) or ETFs. It costs a lot of money to get people to recommend awful investments. Or, put another way, awful investments don’t come cheap.
The participants were asked: isn’t it cheaper, in the long run, to pay a one-time commission than an annual AUM fee? Yes, said Hegna, which is why the transactional model is better for millions of less-wealthy consumers. Rostad said that the comparison is actually apples vs. oranges. He noted that the one-time commission pays for one-time (and conflicted) advice, while the annual AUM fee pays for ongoing advice and service, year after year. On a net present value basis, the two costs are surprisingly similar. But the annual fee comes with ongoing advice and counsel.
At the end, Hegna delivered what he clearly believed was the fiduciary knockout blow: that the DOL never intended to enforce the fiduciary requirement. Instead, it was relying on the court system for enforcement, creating a field day for lawyers.
Rostad suggested that real fiduciaries are willing to face this added burden of responsibility and the possibility of court action, while the sales industry has been pushing back against this check and balance on its collective behavior. One might wonder why, if agents truly are always putting the interests of their customers first.
There was a poll before and after the debate, and it was clear at the end that:
- Most of the audience to this webcast disliked the DOL rule and
- Few minds were changed by the debate.
But that doesn’t mean the exercise was without value. Advisors on the fiduciary side got a rare chance to see what the mainstream fiduciary opponents think and believe, unfiltered by the sly wordsmithing of the industry attorneys and lobbyists.
Even the most rabid fiduciary advocates will acknowledge that there are tens of thousands of sincere, consumer-focused individuals operating in the insurance sales and brokerage environment. What do these commission-compensated professionals think about this perceived threat to their way of life?
More than 100 webinar participants submitted questions, which either provided a window into their genuine curiosity or (more often) revealed the slant through which they view the fiduciary debate. Here are a few of the takeaways that illustrate how those in the anti-fiduciary camp view things:
- They believe insurance agents may actually be the only true fiduciaries, because insurance agents are the only ones who take into account the possible benefits of insurance products.
Hegna seems to speak for a lot of agents and brokers on this point, when he says that “fiduciaries” avoid recommending insurance coverages because they don’t get commissions for doing so.
Some of the questions reflected this mindset:
If being a fiduciary requires you to provide sound advice to your clients, then why do brokers/investment advisors only provide investment advice and don't practice holistic advice/planning? How is that being a fiduciary?
Please compare and contrast the duties of a fiduciary specifically against the insurance professional acting in the best interest of their multi-line customer. List them specifically so we can hear the differences that you speak of.
Best interest for the little guy is a lifetime income stream that has very LITTLE downside risk.
Best interest is savings protected by an insurance contract, Mutual Funds and bonds cannot protect the small investor. This is his RETIREMENT Income, not mutual fund risk.
Another view, also apparently prevalent in the insurance world: if agents firmly believe in the value of life insurance, then when they recommend insurance instead of no-load funds, aren’t they, too, acting as fiduciaries?
If an investor wants to invest $1 million and meets with three different fiduciaries and receives three different courses of action, how will he/she know which advisor was correct? How will the advisor be held accountable for recommending a course of action that he/she firmly believed in if it proved to get a lesser result than the other advisors? What will those consequences be?
Insurance agents may object to the idea of a retrospective “best” recommendation standard, but they believe that their products were, with the benefit of hindsight, superior recommendations during a recent period in American financial history. Why aren’t we taking that into account?
Knut, you are so biased towards the securities industry. What do you say to all the people that lost up to 42% of their retirement assets in 2008? If those funds had been in insurance products they would have lost nothing.
That comment and others reflects extreme risk-aversion in the anti-fiduciary mindset. Many of the questions reflected the belief that planners should avoid equity-market risk in favor of “safe” insurance-based products.
Some agents seem to be going so far as to argue that commissions are the only truly unbiased source of compensation, because the agent only gets paid if the customer takes action.
The cost-benefit analysis did not even account for the positive effects of commissions which give agents the necessary incentive to help consumers get out of low yielding bank accounts.
And anyway, why can’t we agree that salespeople can, and often do, act in the best interests of their clients?
Knut has said that sellers "sell." I agree with that. When in our capitalistic economy did selling (the marriage of product and price in a win/win transaction) become a bad thing?
Why does the speaker claim that just because you are in sales that you are not doing what is best for the client?
After all, everybody sells. So what’s the difference between those who act as fiduciaries and those who don’t?
"Are fiduciaries not selling their service? Does this not make them salespeople?
- So-called “fiduciaries” and the AUM model have enormous conflicts that nobody seems willing to talk about.
Maybe I should call this 1A, because it’s a continuation of the previous argument. Fiduciary advisors (and the Department of Labor) are, in the view of agents, “biased” towards managing client portfolios themselves, instead of having those portfolios guaranteed by, and managed by, a life insurance company.
What will stop an AUM fee-based model from becoming a conflict of interest? For example, an advisor may not advise to move money into an income annuity because this will decrease the amount of funds in the fee-based account? This to me will lead to yet another conflict of interest.
Fiduciaries typically don't handle insurance because they are not licensed to do so. It is well known this is because of a prevailing sense of snobbery around not wanting to be seen as an insurance person. So how can they provide guaranteed products and address longevity risks as Tom stated if they are not even licensed to do so and mostly do not want to be either? Clients need both certainty and upside, not just upside and unprotected downside.
Insurance companies offer the best IRS approved tax free retirement product available today that gives you long term care options and protection of the family with the tax free death benefit. How can someone call themselves a Fiduciary if they cannot offer all products?
By this logic, those so-called fiduciaries are actually the most likely to be scamming their clients, because they put their hands on the client’s money, and because their recommendations are not reviewed by teams of compliance professionals at the home office or BD.
How come every problem or Ponzi scheme has been rooted in AUM, fiduciary platforms? Insurance product sales are typically reviewed by the sales person and a number of qualified employees, including compliance persons of the issuing carrier. What happens with the client who does not have the protection products with guarantees offered as part of a diversified portfolio in a downward market?
There’s the simple argument that investing through an insurance carrier is always the superior solution.
Isn't it possible to continue to sell annuities on commission if the strategy is proven in an objective way to improve the outcome for the client?
I let my 7 and 66 expire because stocks and bonds are high risk. My business is now exclusively FIA because it's the only safe product for the little guy.
And anyway, agents and brokers who charge commissions are a thriftier alternative to the ongoing drag of an AUM fee.
Knut, explain how an ongoing asset management fee – potentially for life – is better for the consumer than a commission in a so called "conflicted" product?
With assets under management you are paid a fee each and every year whether the client makes money or not, correct? What is fair about that? Please explain.
- The DOL Rule is yet another example of government overreach, and intrusive government regulations interfere with the efficiencies of the marketplace and impose additional costs, not only on professionals, but on consumers as well.
One participant, who may have been a dually-registered rep affiliated with an independent BD, notes that the impact of DOL on his own sales activities – even with the delays – has been nightmarishly burdensome:
Compliance costs are skyrocketing. Paperwork is multiplying. Consumer choices are diminishing. Legal liability is mounting. The effects are subtle but very real and in the long run the losers will be consumers saving for retirement while the winners will be bureaucrats, compliance departments, and trial lawyers.
Others worry about the impact, not on agents, but on their customers:
Isn't the real risk of moving ahead with the Rule “as is” on January 1, 2018 fall most heavily on the fixed-annuity consumers, many of whom are low and medium income American, who will see access to retirement product choices and availability shrink and access to trusted retirement advisors diminished?
And some say, basically, that they are already regulated to death, and that more regulation is not the answer to the relatively small number of bad apples in a very large industry.
All of the people the DOL is targeting are already regulated by FINRA and state insurance regulators. Some are also subject to scrutiny by CFP and other associations. Why do we need new oversight? Are these organizations failing?
Knut, the straw figure in this argument is your accusation that one bad apple (advisor) somehow becomes 20, 40 or 60 % of all advisors. FINRA has been monitoring advisors for decades and they readily admit that the bad apples are in the single digit percentages – yet this move forces 90% plus of all industry participants must pay for the sins of a few.
- The DOL Rule is part of a government conspiracy whose real intentions are not widely understood.
Suspicion of our institutions is at an all-time high. What is their REAL agenda when they pass onerous regulations that require brokers and agents to treat their customer like they would their grandmother? This may be a sneaky government attempt to take over the retirement industry:
The DOL will drive small investors to government run plans which is the hidden reason to force the Rule on the industry. How will that benefit America's readiness to retire?
Or it may be a conspiracy to extinguish the insurance distribution system altogether:
The so-called best interest contract exemption (BICE) was designed for the securities industry and never took into account the unique independent agent distribution system used in the fixed annuity industry. In fact it is impossible for the existing distribution system to survive under this rule as written and the industry is likely to undergo massive structural changes that will hurt a lot of jobs, careers, businesses!
I hear about how insurance products will be banned under the fiduciary rule.
Is there not a presumption under the Rule that commission-based products are inherently inferior to those product or service solutions that otherwise non-commissioned based?
Knut, Isn't the DOL just a back door way for the federal government to get into regulating Insurance Companies that are currently being regulated by the States, and trying to slow down the billions of dollars that are leaving the stock market into Insurance Companies?
Of course, there were some questions from advisors who seem to favor the DOL rule, basically saying that they do recommend insurance coverages by teaming up with a trusted independent agent, and that people who sell indexed annuities and non-traded REITs would probably not be so enthusiastic if it weren’t for their high commission structures. (My take: remove the commissions, make them no-load products and let’s see if any agents or reps still think they’re a superior product to recommend.)
But those arguments are well-known, while the insurance and brokerage professionals have largely spoken about the DOL rule through their attorneys and lobbyists. If fiduciary proponents want to engage the DOL rule skeptics about the industry’s topic du jour, this interesting, relatively impartial debate, and the questions that came out of it, provide a window into the minds of the sales community. It will help get the conversation started on an informed note.
Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.
Read more articles by Bob Veres
In case you missed it, on September 7, APViewpoint hosted one of the best debates ever regarding the fiduciary standard and the DOL rule. It was notable because:
