The following is a response to AdvisorOne Editor-at-Large Bob Clark's column, "Why Arguments Like NAIFA's Against Fiduciary Standard for Brokers May Backfire."
Dear Mr. Clark,
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In your column, one of the ways you define fiduciary is “doing the right thing” for clients. We accept that fundamental premise. Others have defined it as putting a client’s “best interests” first. However, what no one is saying is what these slogans and sound bites really mean. What are a client’s best interests and how do we determine them? Is the lowest cost product always in the client’s best interests? How about the one with the best performance return? And whose interests are being served by an RIA who charges upfront fees and rejects clients with portfolios under half a million dollars or who doesn’t take a holistic, comprehensive approach to risk management to protect investors against life’s major contingencies? An RIA doesn’t have to worry about the best interests of less-wealthy clients, because these people can’t afford the RIA’s investment minimums.
And this is where NAIFA members come in. They provide lower- and middle-income Americans with a full litany of insurance and investment products.
What people do agree on is that in its purest form a fiduciary relationship is a legal relationship. Inherent to that is increased liability and increased layers of regulation, which historically has increased costs that are passed on the consumer. And that is why NAIFA has argued against a one-size-fits-all fiduciary standard.
We certainly do believe what we say, and we think people are smart enough to realize that just because someone says they are acting in a client's “best interests” that doesn’t necessarily guarantee or translate in the marketplace that their best interests are being served. That’s why we encourage people to sit down with their advisor and get to know him or her, to make sure they are comfortable with that person and to build a long-term professional relationship based on the highest levels of trust, integrity and quality service.
NAIFA members are small business owners who, by and large, serve middle-income investors and work in their own communities. NAIFA members absolutely do serve the best interests of their clients every single day. There is empirical data that broker-dealers and their registered reps are examined on average once every two years, while RIAs are examined only once every 11 years. Therefore, under the current system, the more rigorous and robust examination system is on the broker-dealer side. Furthermore, we believe the relationships our members forge with their clients are as important as any standard of care for protecting consumers.
NAIFA’s mission statement promotes high ethical standards among our members, and we place great emphasis on their doing the right thing for their clients. Strong laws and regulations already exist to discourage and punish bad actors. Our argument is that our members and their clients would be harmed by the additional legal and regulatory burde
ns a legal fiduciary duty would carry, because the additional costs would disenfranchise middle-income investors.
Sincerely,
Terry K. Headley, LUTCF, LIC, FSS
NAIFA President