Fiduciary watchdog Knut Rostad warns that RIAs must zealously expose wirehouses tricked out in best-interests-of-the-investor drag

January 6, 2017 — 6:33 PM UTC by Guest Columnist Knut Rostad


Brooke's Note: Earlier this week, in the spirit of the New Year (and juiced up on DayQuil), I wrote a piece about how RIAs were looking good heading into a Trump era where ethics may be viewed as so much sand in the gears of commerce and government. While some are willing to undergo that let-the-boys-play philosophy at a national level, few of any political stripe want their advisor to play reindeer games with the stewardship of their personal wealth. In that scenario, I observed, investors are going to vote RIA with their dollars more than ever. In the response below, Knut Rostad endeavors to dial me back, essentially saying that I have too dogged a belief in Milton Friedman's efficient markets given Wall Street's inordinate wont to toss sand in those gears with impunity.

In his series “Free to Choose,” famed economist Milton Friedman rings a familiar libertarian note when he writes that  consumers are  "protected by the market itself. They want the best possible products at the lowest price. And the self-interest of the producer leads him to provide those products to keep customers satisfied. After all if they bring goods of low quality here you are not going to keep coming back to buy them.”

The Godfather of monetarism and Nobel Laureate's message rings loudly at the dawn of the era of Trumponomics, but not so loudly as to drown out the future of RIAs.

Indeed, in a recent opinion piece for RIABiz, editor-in-chief Brooke Southall argued that RIAs, with a service superior to and more ethically sound than their Wall Street competitors, can fall to only one enemy -- themselves -- if they fail to clearly explain -- actually, to show and tell -- their value proposition to prospective clients. See: Why 2017 dawns brightly for RIAs, an oasis of unflinching ethics in an ethics-optional atmosphere,

Brooke's rationale is simple. The RIA mousetrap is superior. Better yet, investors today get, as they have never gotten before, why the RIA mousetrap beats the competition. Paralleling lessons learned from the election, he suggests RIAs can only mess it up if they “tread the forlorn path of the 17 failed Republican primary contenders and one Hillary Clinton – namely by doing a crappy job of explaining what the challenge is and why RIAs have the best solution.”

Bottom line: Irrespective of what Trump policies mean the for future of the DOL rule, RIAs largely control their own destiny. See: Dale Brown tells RIAs why SEC's fiduciary standard is too costly for their clients.  RIAs must chuck the conventional sales playbook, chuck the awful jargon permeating RIA talk, and start afresh. If they don’t, Brooke’s bright 2017 will be in a fog in January 2018.

We're all 'best interest' brokers now

Merrill Lynch, J.P. Morgan and their like won't make it easy. They are, of course, not failed contenders. They are fierce and successful competitors that will not quietly drop out of the race. They present a greater threat to RIAs than did any of the 17 Republicans to the current president elect. That's because wirehouses have advanced a “uniform standard” -- without any accompanying regulatory action -- and have, once again, successfully muddied the water.

Milton Friedman: The self-interest of the producer leads him to provide those products to keep customers satisfied. After all if they bring goods of low quality here you are not going to keep coming back to buy them.

Take Merrill Lynch -- it's foray into the new DOL rule-branding world is nothing if not brilliant. According to a Merrill Lynch ad, its brokers are essentially just like RIAs, regardless of whether they're advising on a retirement account or recommending a product for a non-retirement account. See: Using DOL as cover, Bank of America cuts the Merrill Lynch bull as it adds a robo, stops paying brokers to stick around and kicks John Thiel upstairs.

Further, in the environment of uncertainty surrounding the status of the DOL rule and what BICE means, other industry voices, bolstered by healthy ad budgets, will loudly parallel Merrill Lynch's messaging. They’ll suggest: DOL rule or no DOL rule, BICE or no BICE, policies and procedures and a credible enforcement mechanism or not, it doesn’t really matter. All brokers are "best interest" brokers, now. After all, the rationale goes, huge investments of time and money have been made to become DOL-compliant and we can’t go back, now. See: Jaws drop after Dale Brown Skypes keynote address to Laser App conference with the claim: 'We were fiduciary believers long before being a fiduciary was cool'.

The challenge of re-differentiation

This is what Schwab CEO Walt Bettinger may have been thinking at IMPACT last October when he urged RIAs to “re-differentiate" from those “wanting to look and act and to appear” to be RIAs. See: As Bernie Clark and Walt Bettinger go on offense, LPL and Wells Fargo names get named and a B2C robo dry-up gets foretold at Schwab IMPACT in San Diego.

Re-differentiating means explaining the better mousetrap in plain language and in a straightforward way that resonates with ordinary investors. This means RIAs must explain clearly and publicly what they do. They must say and do what fiduciaries do.

But, as important, RIAs must also say what non-fiduciaries don't, won’t or can't do. They must highlight tasks that, in fact, many non-fiduciary firms won’t let their brokers perform.  See: FINRA shifts an unwelcome spotlight away from itself -- by training it on the brokers it oversees

The Institute for the Fiduciary Standard's Best Practices are crafted, in part, to assist advisors in re-differentiating their services from those of faux-fiduciary wirehouses.

In black and white

What are some examples of tasks that can re-differentiate fiduciaries from non-fiduciaries -- tasks that ordinary investors consider important?    

  •  Put in writing that fiduciary duties apply always and with all clients.
  • Put in writing your agreements and conflicts of interest; give these documents to clients.
  • Report to clients their fees and investment expenses.
  • Zealously avoid conflicts.
  • More zealously mitigate unavoidable conflicts to satisfy the most skeptical and best informed clients.

The new year offers RIAs unparalleled opportunities, irrespective the new administration’s policies and the fate of the DOL rule. RIAs have a better mousetrap, can clearly explains how it works and how the competition''s doesn't work nearly as well.

In 2017 and the new era of Trumponomics, RIAs may well adopt Friedman's rallying cry when speaking to investors: “Free to choose!”

Knut A. Rostad, MBA co-founded and chaired the Committee for the Fiduciary Standard and co-founded and is president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance the fiduciary standard through research, education and advocacy. 

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FAA said:

January 7, 2017 — 3:43 PM UTC

It is NFL Wild Card weekend and every Head Coach, offensive/ defensive coordinator, QB has a game plan...on paper which sounds great. That is until you actually play the game and have to execute to win. It's the same thing here...while agreeing with much of what has been written- it is way too soft. 'Zealously avoid conflicts"? What does that mean? Is it it sort of like Eli Manning zealously avoiding interceptions? How about if you disclose any and all potential conflicts including any sort of renumeration for the placement of any investment related product? That includes scrapes, up charges, spreads at the platform of TAMP level, commissions etc. Report all fees and investment expenses? Nope- how about report all fees, expenses outlying who gets paid and for what along the entire food change? Just freaking lay it out- how much for the advice, how much for vehicles, how much for performance reporting blah blah blah. Case in point- one firm which actually had 'retirement' in their name charged an advice fee and garnered the 12b-1 fees on the backend. I asked if they disclosed that to their clients- their response 'they wouldn't understand that and all the things we do' Really? Demystify the process and I think you would go a lot further in distinguishing yourself. Document, disclose, defend...

Jack Waymire said:

January 7, 2017 — 5:08 PM UTC

Do not forget the impact of the Internet. Astute investors have unprecedented access to information that used to be controlled by Wall Street. Investors can use the information to learn more about financial advisors in general and learn more about specific financial advisors. This creates a unique marketing opportunity for high quality financial advisors. Low quality advisors cannot afford to practice online transparency - they have too much to hide. High quality advisors should use the Internet to practice transparency, deliver their value proposition, and publish characteristics that differentiate them from other fiduciaries and non-fiduciaries. The big winners in the Internet age are investors and high quality RIAs.

brooke southall said:

January 7, 2017 — 7:11 PM UTC

Excellent point, Jack...probably even a good column topic:)

brooke southall said:

January 7, 2017 — 7:16 PM UTC

FAA, You nailed it. I love this: "How about report all fees, expenses outlying who gets paid and for what along the entire food chain? Just freaking lay it out- how much for the advice, how much for vehicles, how much for performance reporting blah blah blah." Indeed! In a world where everyone is running lookalike businesses with lookalike jargon, why isn't somebody trying the business model of pathological, answer-more-than-asked truth telling and disclosure?!!!! Somehow it is still considered gauche to ask for all-in fees. Brooke

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