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Fiduciary or Not? Participants Deserve to Know
It is no secret that I am a critic of the ASPPA/NTSSA/Graff policies of favoring unlimited vendors and noncompetitive, imprudent individual retail annuity products in 403(b) plans and allowing non-fiduciaries to service school employees. Non-fiduciary advisors servicing school employees should also make it clear that they are NOT registered to provide participant advice. It is my opinion, that a properly run single vendor system is the best way to increase participation rates, contribution amounts and to help school employees retire in dignity. ASPPA believes that any vendor should be allowed to offer their products – with no fiduciary oversight.
While I think Single Vendor is the best route, I am also a realist and understand that a single vendor environment is not going to happen overnight (actually, it has in many progressive school districts). It got me thinking about what can be done to protect current participants who are stuck in a non-oversight multi-vendor program or even a program that does have oversight but has multiple vendors.
ASPPA is working on a compensation disclosure document that will be voluntary for agents (presumably the vendors won’t be required to participate, but this is unclear to me). Why it is taking so long to create such a simple document is beyond me, but what it won’t include is a statement as to the fiduciary status of the agent or broker selling the product.
The inspiration for this blog post came from financial planning thought leader Michael Kitces at Nerds Eye View.
I believe that if ASPPA is truly interested in disclosure – they should follow the guidelines Kitces sets out.
Kitces recently wrote The Public Deserves A Choice, But It’s Not Fiduciary Vs Suitability which echoes my view (but is much more coherent!). Michael has granted me permission to reprint the post in its entirety below, but first I’ll quote from it:
In the ongoing debate for the fiduciary standard, supporters of fiduciary have suggested that everyone in financial services should be subject to the standard, while those opposing have responded that consumers deserve a choice between fiduciary and suitability; in essence, they simply suggest that we should let consumers choose whatever method of financial services they prefer, and may…the best model win. But to me, the choice presented is a false one (see Dauenhauer’s False Choice post): the real choice is not between fiduciary advice and suitable advice, the difference is between fiduciary advice and suitable product sales (emphasis added). In other words, the real choice we should present to consumers is between advice and product sales, and the real goal of the planning profession should be to focus on who is and is not qualified to deliver advice.
Before I unpack the above statement, I’d like to quote from NTSAA representative Robert Richter (www.savemy403b.org) who has opposed my views:
We have established a joint task force with the National Education Association and the Association of School Business Officials to create fee disclosure standards for public school 403(b) plans. These national standards will allow public school employees to make apples to apples comparisons of different 403(b) options so they know clearly how much they are paying and what services they are paying for. As we know in the 401(k) industry, it’s not all about fees and public school employees should not be denied the opportunity to work with a personal advisor and product provider they trust.
What we learn from Richter is that ASPPA/NTSAA is quite concerned about allowing “…public school employees to make apples to apples comparisons of different 403(b) options…” and so I propose we allow them to do just that. Of course I want fees and commissions disclosed, but if participants need apples to apples comparisons to make good decisions on their 403(b) fees, we should also allow them to compare “advisors” on such a basis.
I am calling on ASPPA to practice what they preach and require that those who want to work with public school employees and give “advice” be a fiduciary and those that sell product must disclose they are NOT advice givers and NOT acting as fiduciaries. ASPPA should adopt this policy for any non-fiduciary who becomes a member of ASPPA or its member organizations. ASPPA should support the following dictum layed out by Kitces:
If you don’t want to be treated as a fiduciary, that’s fine; just don’t offer advice, and don’t hold yourself out as offering advice. People who offer securities or insurance products for sale eliminate the words “financial advisor” or “financial consultant” from their business cards, and simply hold themselves out for doing what they do: registered representative, stockbroker, or insurance agent. Those who offer advice hold themselves out as advisors, and subject themselves to the appropriate standard.
This compromise allows for non-fiduciaries to still work with 403(b) plans that have chosen to stay multi-vendor, they just can’t give advice. In a private e-mail with Kitces (which he has granted me permission to share), he made the following analogy:
“I still view it as analogous to the medical industry. You can be a doctor and give advice, or be a drug company and sell your products (albeit also subject to some amount of regulation and oversight). But you can’t be a drug company giving advice about drugs; advice is fiduciary and products are not, but advice is separate from products.”
I’ve always held the position that advice givers should be fiduciaries, it is time that ASPPA endorses this common sense (which happens to be current law (Section 202(a)(11)(C)) position. This will allow school employees to make a true apples-to-apples comparison among the advisors they choose while also providing the proper disclosure. It preserves the “choice” position that ASPPA has so desperately clung to, but puts clear parameters around that choice as well as clear disclosures. Sell product or give advice – but be clear about it.
Kitces goes on to say:
But the real point here is that fiduciary advice vs suitability advice is a false dichotomy; the only kind of advice is fiduciary advice, delivered in the best interests of the person receiving the advice. Merriam-Webster defines the act of advising as “to give (someone) a recommendation about what should be done” (emphasis mine); in other words, telling the person what should be done that’s in their interests is the very essence of what advice is, in the first place! On the other hand, the suitability standard is about offering a product for sale that is suitable – or at least, not unsuitable – given the client’s circumstances. The latter, simply put, is not a standard for advice; it’s not actually about advice at all, but simply determining whether a product being sold is so unsuitable that it’s unconscionable to allow it to be bought at all. Advice, as Merriam-Webster makes clear, it about telling someone what actually should be done, not merely what would be “not unsuitable” to buy. In fact, the existing securities regulations (Section 202(a)(11)(C)) have already stated that any advice delivered in a product sales context should be “solely incidental” to the sale of the product; if the primary focus of the relationship is about the delivery of advice and/or special compensation is received for advice, the fiduciary standard already applies!
I think it’s better if I just re-print Kitces entire post below – his eloquence on the subject is convincing.
In the ongoing debate for the fiduciary standard, supporters of fiduciary have suggested that everyone in financial services should be subject to the standard, while those opposing have responded that consumers deserve a choice between fiduciary and suitability; in essence, they simply suggest that we should let consumers choose whatever method of financial services they prefer, and may be the best model win. But to me, the choice presented is a false one: the real choice is not between fiduciary advice and suitable advice, the difference is between fiduciary advice and suitable product sales. In other words, the real choice we should present to consumers is between advice and product sales, and the real goal of the planning profession should be to focus on who is and is not qualified to deliver advice.The inspiration for today’s blog post comes from several recent Twitter debates that I’ve had about the fact that I believe the focus on fiduciary is the wrong message to send to the public. As I’ve noted previously on this blog, consumers already believe that advisors have their best interests at heart, so promoting fiduciary isn’t really about saying “you can trust me” – it’s just about bashing your competition and saying THEY can’t be trusted. And a negative advertising campaign that bashes the competition is a terrible way to advance the profession, and your own financial planning practice.But the real point here is that fiduciary advice vs suitability advice is a false dichotomy; the only kind of advice is fiduciary advice, delivered in the best interests of the person receiving the advice. Merriam-Webster defines the act of advising as “to give (someone) a recommendation about what should be done” (emphasis mine); in other words, telling the person what should be done that’s in their interests is the very essence of what advice is, in the first place! On the other hand, the suitability standard is about offering a product for sale that is suitable – or at least, not unsuitable – given the client’s circumstances. The latter, simply put, is not a standard for advice; it’s not actually about advice at all, but simply determining whether a product being sold is so unsuitable that it’s unconscionable to allow it to be bought at all. Advice, as Merriam-Webster makes clear, it about telling someone what actually should be done, not merely what would be “not unsuitable” to buy. In fact, the existing securities regulations (Section 202(a)(11)(C)) have already stated that any advice delivered in a product sales context should be “solely incidental” to the sale of the product; if the primary focus of the relationship is about the delivery of advice and/or special compensation is received for advice, the fiduciary standard already applies!Accordingly, the real debate is not about whether consumers should have a choice between fiduciary or suitability; the real choice is between working with an advisor who delivers advice and working with asalesperson who sells a product. Notably, the latter is not intended in a derogatory or pejorative manner; it is simply to make the distinction between someone who offers bona fide advice – which, by definition, is in the interests of the person receiving the advice to get a recommendation about what should be done – versus someone who offers a product for sale, which is implicitly in the interests of the person or company offering the product for sale but should only be offered when it is not unsuitable to do so.Why is this distinction of advice versus sales more important than fiduciary versus suitability? Because, cast in the context of advice versus sales, the solutions quickly become more readily apparently. The goal of fiduciary advisors should not be to subject everyone to the fiduciary standard; it should be to subject everyone offering advice to the fiduciary standard. If you don’t want to be treated as a fiduciary, that’s fine; just don’t offer advice, and don’t hold yourself out as offering advice. People who offer securities or insurance products for sale eliminate the words “financial advisor” or “financial consultant” from their business cards, and simply hold themselves out for doing what they do: registered representative, stockbroker, or insurance agent. Those who offer advice hold themselves out as advisors, and subject themselves to the appropriate standard.In this framework, then, it’s not about whether consumers deserve a choice between fiduciary and suitability standards; it’s a choice about whether they want to buy their products from a salesperson, or receive advice from an advisor. It’s a much clearer choice. Eventually, we might even see a world where a prospective buyer of an insurance policy, after being told about the policy’s benefits and features, asks the question “But is this policy right for me?” to which the insurance agent responds “Oh, I’m sorry, I can’t give you advice on that; you’d have to ask your financial planner.” The agent responds this way because he/she doesn’t want to be held to a fiduciary advice standard if he/she isn’t giving advice. And the consumer receives a genuinely clear distinction about what role the insurance agent does, and does not, serve.In fact, arguably consumer clarity itself is a major benefit of shifting the dialogue in this manner. While consumers have made it clear they don’t understand the different between a fiduciary and suitability standards very clearly, the difference between “is this person giving me advice, or not” is much clearer. In fact, it highlights the problem, as noted in the RAND study itself: “most investors believe that the financial intermediary is acting in the investor’s best interest [regardless of whether delivered from a broker-dealer or investment adviser].” Perhaps the best target for advocacy is not to expand the fiduciary standard to all, but instead to remove the “solely incidental” exception for advice delivered by registered representatives, and simply make all advice subject to fiduciary.But the bottom line is this: debating about the fiduciary versus suitability standards is a lost cause. The public doesn’t understand the distinction, in no small part because they simply cannot conceive of anyadvice that isn’t in their best interests, since that contravenes the very definition of advice. The real issue to the consumer is whether they are receiving advice at all, or whether they are simply being pitched a product for sale. By creating a distinction between product sales and advice, consumers can have a clear choice about which they want, and each can be regulated in its own appropriate framework. And if a product salesperson doesn’t want to be held to the standards of advice – client-centric fiduciary, with the necessary competence including education, training, experience, and ethics – that’s fine; just make it crystal clear to the buyer that no advice is being delivered. Just as so many advisors are already quick to emphasize that they are not tax advisors and cannot/do not give tax advice, so too would they make it clear they are not financial planners and cannot/do not give financial advice, unless they truly wish to deliver such advice and be held to the associated standard. (emphasis mine)So what do you think? Is “advice vs product sales” a better distinction than “fiduciary vs suitability”? Does it make a clearer distinction for the public? How could we shift our advocacy, lobbying, and discussions with the public if we focused the debate on separating advice from product sales, instead of fiduciary from suitability?
I think Michael’s point is clear and I would challenge ASPPA to take a serious look at such a framework.
I’ve tried to find a compromise on the “Vendor Choice” issue, but I cannot logically make the leap that offering an unlimited number of investment options with no oversight and no fiduciary responsibility makes for better retirement outcomes – there is simply no evidence for it, none. Given that ASPPA has failed to meet a single challenge so far (Brian – the debate option is still on the table) I am convinced they will continue to ignore me (while getting enormous pressure from their membership).
Scott Dauenhauer CFP, MSFP, AIF
