Barbara Roper, the director of investor protection for the Consumer Federation of America, said in a Sept. 27 Washington Post’s Capital Business commentary that “insurance trade associations … continue to argue disingenuously but vigorously that investors would suffer if insurance agents were subject to a fiduciary duty when recommending variable annuities and other securities.”
How have we been disingenuous? We continued reading Roper’s column, looking for her to explain who will pay for the increased costs sure to be associated with a universal fiduciary standard. While such a standard may provide little or no additional protection to consumers — registered representatives are already tightly regulated under the existing suitability standard and a fiduciary duty does little to deter the very small number of bad apples intent on defrauding clients — it would certainly increase the reps’ legal, liability, insurance and compliance costs. Roper didn't offer any explanations.
In reality, advisors would have little choice but to pass the costs on to their clients. The result? Many middle-market investors may no longer be able to afford professional financial services. Some advisors would retire or leave the industry rather than overhaul their business models. Others would be forced into requiring clients to pay up-front fees for services and eliminating other payment options. How would investors not suffer if we reduce their freedom to decide how and from whom they buy investments as well as how they pay for them?
These themes run deep through the hundreds of comments rank-and-file NAIFA members submitted to the SEC on the issue:
- Steve Hampton tells the SEC that increased liability and legal costs “will ultimately eliminate the ability to help any client, excepting those with huge sums for investment or those who wish to deal only [on] a fee basis. The assistance for small investors, which constitutes essentially all of my clients, will become an uneconomic venture and these people will be left to navigate their investment decisions alone.”
- Lisa Kentfield writes that “a new legal fiduciary duty … will subject me and any reg rep to never-ending lawsuits, as well as drive everyone to a fee-only model. This will have a profound effect on how my lower- and middle-income clients are currently served. In effect, my lower- and middle-income clients, [who] do not have large financial assets, will not be able to afford the costs of a fee-only model.”
- John Thornton writes that compliance and liability “costs have to be passed on to the consumer and will result in higher fees if additional layers of regulation are imposed. This is not going to be good for anyone, especially clients who really depend on professional assistance and do not have significant resources to pay these costs.”
- Lorin Kieschnick writes that “the ‘fiduciary standard’ would cause me to have to pay additional fees for Errors and Omissions insurance and charge my clients unnecessary front-end loads and fees as well. It does not benefit either side of the advisor-client relationship and would drive me out of business as a young advisor.”
Are Steve, Lisa, John and Lorin’s concerns for their clients disingenuous? We certainly don’t think so.
