Reporter Andy Kiersz at Business Insider has been pouring through the US Census Bureau’s American Community Survey database. The ACS is a Census-like measure of demographic information about the USA that is published once a year, and the 2013 data just became available.
His post today caught my attention, which was the youngest median population town or village in each state. The winner for the entire United States is right in our backyard: Kiryas Joel, New York.
Kiryas Joel is a village whose residents are primarily Satmar Hasidic, a sect of Orthodox Judaism who seem to generally reject modern, secular culture. Anecdotally, marriages seem to happen relatively young, and families tend to be large, with an average household size of 5.7 twice as high as the New York State average of 2.6, which is the cause of the low median age.
The effect that Kiryas Joel has on the region, particularly with regard to social services, is profound. According to a 2013 report, a full 93% of the village’s population either receives Medicaid or the Medicaid-funded Family Health Plus. Due to the high birth rate, the village continues to grow exponentially as well, with the population expanding at a rate of about 3-4% per year.
Much of the developed world, meanwhile, is experiencing a slowing birth rate, as wealthier and more educated populations tend to produce less children at a young age. This has a very serious economic impact in the extreme cases (see Japan, China).
Thus, as much as Kiryas Joel skews demographics today, it looks like it will yield a greater influence going forward as its population continues to grow, particular in relation to slowing trends elsewhere in Orange County and New York.
COURT DISCUSSES MUTUAL FUND FEES. “[P]articipants’ retirement benefits are limited to the value of their own individual investment accounts, which is determined by the market performance of employee and employer contributions, less expenses. Expenses, such as management or administrative fees, can sometimes significantly reduce the value of an account in a defined-contribution plan.”
As seen above, the Supreme Court noted that mutual fund expenses “can sometimes” significantly reduce the value of investment accounts. This statement can be read several different ways.
The Supreme Court noted these facts in the case: “Petitioners contend that respondents breached the duty of prudence by offering higher priced retail-class mutual funds when the same investments were available as lower priced institutional-class mutual funds.” However, the Supreme Court did not opine on this aspect of the case, nor upon the trial court’s finding that the plan sponsor “had ‘not offered any credible explanation’ for offering retail-class, i.e., higher priced mutual funds that ‘cost the Plan participants wholly unnecessary [administrative] fees,’ and [the trial court] concluded that, with respect to those mutual funds, [the plan sponsor] had failed to exercise ‘the care, skill, prudence and diligence under the circumstances’ that ERISA demands of fiduciaries.”
Nevertheless, given the clear duty of due care of an ERISA fiduciary to justify higher-cost funds, the burden is very heavy upon an ERISA fiduciary to recommend higher-cost investments when lower-cost investments are available which are substantially similar in terms of their composition, risks, and expected returns. One of the key issues for analysis of the “Best Interests Contract Exemption” is whether higher fees and costs incurred – that results in additional compensation to the broker-dealer firm or insurance company – can ever be justified under ERISA, and if so, what this justification would look like. What is the evidentiary standard for such justification to withstand scrutiny? The Supreme Court’s decision does not directly address these issues, but it is clear that justification must be credible.
COURT DISCUSSES THE ERISA FIDUCIARY’S DUTY OF DUE CARE. “An ERISA fiduciary must discharge his responsibility ‘with the care, skill, prudence, and diligence’ that a prudent person ‘acting in a like capacity and familiar with such matters’ would use.”
This statement of the ERISA fiduciary’s duty of due care follows many prior decisions.
Note that the U.S. Supreme Court did not discuss the ERISA fiduciary’s duty of loyalty, nor did the Court discuss procedures to be followed under ERISA when a fiduciary possesses a conflict of interest.
COURT DISCUSSES THE ONGOING DUTY OF THE FIDUCIARY TO MONITOR INVESTMENTS. “[U]nder trust law [from which an ERISA fiduciary’s duties are derived] a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.” The Uniform Prudent Investor Act confirms that “[m]anaging embraces monitoring” and that a trustee has “continuing responsibility for oversight of the suitability of the investments already made.” §2, Comment, 7B U. L. A. 21 (1995) (internal quotation marks omitted). Scott on Trusts implies as much by stating that, “[w]hen the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.”
“Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset. The Bogert treatise states that ‘[t]he trustee cannot assume that if investments are legal and proper for retention at the beginning of the trust, or when purchased, they will remain so indefinitely’ … Rather, the trustee must “systematic[ally] conside[r] all the investments of the trust at regular intervals” to ensure that they are appropriate … The Uniform Prudent Investor Act confirms that “[m]anaging embraces monitoring” and that a trustee has “continuing responsibility for oversight of the suitability of the investments already made.” §2, Comment, 7B U. L. A. 21 (1995) (internal quotation marks omitted). Scott on Trusts implies as much by stating that, “[w]hen the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.”
This lengthy discussion of the scope of the ERISA fiduciary’s duty to monitor addresses the key, albeit narrow, issue in the Tibble v. Edison case, which involved when action occurs which is actionable (i.e., when action occurs which tolls the statute of limitations, within which time a claim must be brought).
This aspect of the decision reminds us that ERISA fiduciaries – firms and their representatives – possess an ongoing duty to update their due diligence as to investments previously recommended to a client, at least where the client remains a client of the firm.
IN SUMMARY. Only a small amount of guidance can be inferred from the Court’s Tibble vs. Edison decision. Yet, the Court’s decision can serve as a reminder of the high level of due diligence required in the selection of investments. Moreover, the Court’s acknowledgement of the significant role played in mutual fund expenses in a plan participant’s retirement account value will likely result in a strong focus on the type of justification required to recommend higher-cost investments, especially where higher cost investments result in greater compensation to the ERISA fiduciary (as proposed to be permitted under BICE).
As we approach 2015, I share with my “wish list’ for the DOL, SEC, state securities regulators, and the various voluntary professional associations.
And I encourage YOU to undertake simple act, involving just a few minutes of your time, which may well serve to put us back on the path toward a true profession.
financial/investment advisors. Who will lead? Who will merely follow? Which organizations will embrace bona fide fiduciary standards of conduct for its members? Which organizations will be “fiduciary pretenders” without such a commitment?
- The DOL should apply fiduciary duties upon all who provide advice to all retirement plan sponsors and plan participants. Exemptions from the “sole interests” standard should be limited and used only where plan sponsors and participants are truly benefitted by the exemption.
- The SEC should apply nonwaivable fiduciary duties to all registered investment advisers, even dual registrants.
- When any investment advisory account exists for a client, or when fiduciary duties otherwise attach to the relationship, these fiduciary duties should extend to the entirety of the relationship, and any fiduciary-client relationship should not be capable of being switched to an arms-length relationship.
- In order to prevent actual fraud (i.e., “bait-and-switch”) and to eliminate widespread consumer confusion, dual registrants who utilize titles denoting relationships of trust and confidence, such as “financial advisor,” “financial consultant,” “financial planner,” “wealth manager,” or “estate planner,” or who use designations which incorporate such terms, should be held to the fiduciary standard at all times, for all clients.
- The SEC should also apply fiduciary duties to all providers of personalized investment and financial advice, regardless of registration of the advisor, when a relationship of trust and confidence exists between the advisor and the client.
- In so doing, the SEC is merely restoring the principle – followed by the SEC and even the NASD (precursor to FINRA) prior to the 1970’s.
- The various states should then follow the SEC’s lead, modifying state statutes and regulations to apply fiduciary duties to all providers of personalized investment and financial advice, regardless of registration of the advisor, when a relationship of trust and confidence exists between the advisor and the client, and providing individual investors the right to bring claims under state law.
- “Advice” should be broadly defined to include any circumstance in which the advisor states whether an investment strategy or investment product is recommended to a client. Mere descriptions of an investment product should not, without more, trigger application of the fiduciary standard; i.e.,product seller-customer arms-length relationships should still exist under the law, provided that the arms-length nature of the relationship is laid bare and not obscured.
Apply the Fiduciary Standard to Reduce the Number of Regulations, the Size of Government, and the Need for Wall Street Oversight and Proposed Professional Standards of Conduct for the Delivery of Personalized Investment Advice.
- Understand the substantial public policy reasons which support the broad application of fiduciary principles to the delivery of personalized investment advice. If you don’t understand the rationale, you’ll never understand the fiduciary duties themselves, nor how they should be applied and enforced.
- As alluded to above, don’t permit fiduciary duties to be “waived” by clients, as often inappropriately occurs (just look at the Form ADV, Part 2A, and client services agreements, of many dual registrant firms). Realize that estoppel plays a much more limited role in fiduciary law than it does in arms-length relationships.
- Correct the inappropriate rule in which “portfolio turnover” is reported by mutual funds as the lower of purchases or sales of securities, relative to net assets of the fund, rather than their average.
- Eliminate 12b-1 fees, for all the reasons I have previously written about.
- Eliminate sharing of securities lending revenue by mutual funds and ETFs. Securities lending revenue belongs to fund shareholders. If the investment adviser to the fund desires additional compensation for undertaking revenue sharing activities, this should be reflected in the funds’ management fees. If affliates are utilized to effect securities lending, then benchmarking of the fees of those affiliates should be utilized, with compensation paid to affiliates not to exceed average levels.
- As mentioned above, ensure that those who promote themselves with the use of titles or designations which denote a relationship of trust and confidence don’t then seek to absolve themselves of their fiduciary obligations. Compelling reasons exist for the distinctions to be made.
- Don’t permit any securities firm to use client testimonials. Or permit them all to. Just be consistent (and fair) about the rule. Of course, continue to prohibit misleading ads.
- Repeal the “two hats” and “switching hats” temporary rule of Sept. 2007. Don’t condone consumer confusion, nor encourage misrepresentation and fraud, via SEC rules.
- Don’t permit any securities firm to state “we act in the best interests of our client” or “we provide objective advice” (in any communication, including its Code of Ethics unless the firm and its advisors are willing to practice as bona fide fiduciaries to each and every client, at all times. Otherwise, bait-and-switch (via intentional misrepresentations) occur. And don’t permit language which couches such obligations with language such as “we seek to” or “our advisors aspire to” act objectively and/or in the best interests of clients – as the fine distinction between actually doing vs. aspiring to are the source of much client confusion about broker’s obligations to the client. As the SEC alluded to long ago, arms-length relationships should never be disguised.
- Don’t permit FINRA to state that all brokers and their registered representatives are required to act in their client’s “best interests” unless all of these brokers and registered representatives are willing to accept bona fide fiduciary duties at all times. Otherwise, FINRA just continue to obfuscate by attempting to re-define “best interests,” the common expression of the fiduciary duty of loyalty, as something less than what it means. This just creates more confusion for consumers, as well. Require FINRA to modify its previous statement (in “guidance” provided to its members), in this regard.
- Further restrict soft dollar compensation. Inspect soft dollar arrangements, to ensure that any payments for research are comparable to the cost of research which could be obtained through other means, and ensure that the research is actually utilized.
- Eliminate payments for shelf space and other revenue-sharing.
- Eliminate payment for order flow. You can’t achieve true best execution when such huge economic levers exist in opposition to the requirement for best execution.
- Investigate proprietary mutual funds when used by institutions (banks, investment advisory firms). Are all management fees and 12b-1 fees being rebated to the client of the fiduciary, to avoid double dipping? Are the administrative fees of the fund artificially high (seen in some banks’ proprietary funds, when management fees are rebated but administrative fees are not).
- Eliminate any and all “secrecy” clauses with regard to settlements; require public disclosure of all settlements through regulatory filings for same
- When arbitration is agreed to by a client, require all arbitration in securities matters to be undertaken in independent (non-FINRA) forums. It is extremely important that tribunals be perceived by the public to be fair; as long as they exist under FINRA, that perception will not exist.
- End the “revolving door” between the SEC and Wall Street (and the law firms that serve Wall Street firms). Ban any compensation bonuses to Wall Street executives that go to work for the SEC. Ban SEC staffers from any direct contact with SEC commissioners and staff for three years after they leave.
- Eliminate inspections of custody arrangements by private auditors. Seek “inspection fees” or “examination fees” from Congress for taking these inspections in-house. A more focused fee, the amount of which is statutorily determined and which is tied to assets under advisement for which custody is assumed, would likely be more palatable to Congress than broad “user fees.”) Properly undertaken, government inspections (whether by SEC or state securities examiners) are far more effective in uncovering fraud than private audits will ever be. Firms that don’t possess custody would remain exempt from such fees.
- Become again what the SEC once was – one of the most respected agencies of government.
- Let the SEC once again steer our capital markets system to become the grease for the wheels of capitalism, not the sludge it is currently in which a major portion of corporate profits are siphoned off and never reach the hands of individual investors.
I encourage state securities regulators to clearly state that disclosure of a conflict of interest does not “cure” same, and that much more is required of a fiduciary providing personalized investment advice. Disclosure of all material facts, affirmatively made, and client understanding subjectively assured by the advisor. Informed consent – and with the realization that no client would consent to be harmed. And even then, the transaction proposed must be substantively fair to the client.
I encourage state securities regulators to compel all fiduciary advisors to adopt a fiduciary professional code of conduct, similar to the one I have previously suggested. This will guide the advisors on their fiduciary obligations, as well as provide insights for clients of advisors and examiners.
[I wonder if the CFP Board’s long-standing cry of “one designation, one profession” as a means of advancing the CFP certification among financial planners might turn into “one designation, one non-profession (trade group).”]
- Would the organization be willing to have all of their members be required to sign a non-waivable, always-applicable “Fiduciary Oath”; and
- Would the organization be willing to adopt, for its members, these bona fide fiduciary principles as suggested in these Standards of Professional Conduct.
Why this test? It has always struck me that many organizations say they support a true fiduciary standard. In reality this is may be a marketing ploy for the organization, an attempt to punt the issue to a later time, or a wholly different view of what the fiduciary standard is all about. It’s time we know where each organization really stands. Let them state what principles they agree with, and let them state with particularity principles with which they disagree (or are unwilling to adopt), so that we know where each organization really stands.
The New York Times, Wall Street Journal, MarketWatch, and The Guardian reported this week that US economic growth “stalled” at 0.2% during the first quarter of 2015.
This isn’t inaccurate – but keep in mind that the 0.2% of growth was compared to the 4th quarter of 2014. Here’s a chart:
Note that the first quarter of 2014 was even more harsh – we actually experienced an economic contraction, quarter/quarter, during the first three months of last year.
And yet that didn’t matter in the broad context of 2014 at all, in which the US economy had a pretty good year. So instead of comparing each quarter to the previous quarter, what if we do an apples-to-apples comparison and look back at the first quarter of 2015 compared to the first quarter of 2014?
Not only does this paint a more accurate picture, but also a sunnier one, given that the US economy has grown an average of 2-3% per year for about the last three years.
Yet even annual comparisons can be misleading, since, as discussed previously, 1st quarter of 2014 was particularly bad. Here’s the big picture:
Still strong, still healthy, still expanding. Last year our country was responsible for about $17.4 trillion of economic production, a full 22.5% of the world’s $77.3 trillion.
Sure, there are some headwinds to face, as always. The Fed is likely to raise interest rates later this year. Currency effects are likely to slow the US down in 2015-2016, while these helped in 2013-2014.
But the economy didn’t stall in the first quarter. Especially compared to the first quarter of last year.
It is time to look for an appropriate marketplace solution to the problem that consumers do not know who they can trust. The essential problem is that Wall Street has captured the SEC, and that the SEC has over the past three decades essentially gutted the fiduciary standard under the Investment Advisers Act – by not applying it and by permitting investment advisers (especially dual registrants) to disclaim away their core fiduciary duty of loyalty. Of course, we know consumers don’t understand these disclaimers (“disclosures”), nor the impact of the conflict-ridden practices which the SEC permits dual registrants to engage in.
[See my prior post for a detailed set of subordinate rules, underlying the five core fiduciary principles, which collectively set forth what amounts to a bona fide fiduciary standard. http://scholarfp.blogspot.com/2014/11/less-use-of-financial-advisors-due-to.html]
Given its size and resources, since my prior post some financial advisors have suggested to me that the Certified Financial Planner Board of Standards, Inc. is the best-positioned organization to effect a marketplace solution with a bona fide fiduciary standard. Yet, are the CFP Board’s Rules of Conduct a true, bona fide fiduciary standard? And are the CFP Board’s conduct standards applied at all times when personalized investment or financial planning advice is delivered?
By way of background, the CFP Board’s rules state, in part: “1.4 A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.”
Not All CFPs are Fiduciaries: The Puzzle as to When “Financial Planning” Takes Place.
The CFP Board also goes on to describe when a “financial plan” is being undertaken in its Rules of Conduct. While, to its credit, the CFP Board takes the position that once fiduciary status is assumed the certificant remains a fiduciary throughout the financial planning relationship, there still appear to be instances in which the definition of “financial planning” is construed quite narrowly.
Many, including me, have expressed dismay at the CFP Board’s interpretation of when “financial planning” exists. In essence, it appears to be a vague, multi-factor test which in my view has little basis in common law. Even worse, the CFP Board’s application of the test is confusing to both certificants and advisors. I’ve listened several times to the CFP Board’s webinars which directly address when “financial planning” takes place, and I come away each time befuddled (but not amused). I’m trained as a lawyer, a compliance officer, and I’m an academic – yet I cannot understand the fine lines which the CFP Board attempts to draw (or, perhaps, not draw) nor can I discern how they are founded in established principles of law, including the duty to avoid fraudulent representations found in all commercial transactions.
Should not, as well, the mere holding out as an expert advisor evoke fiduciary status? Should not the use of the term “Certified Financial Planner” automatically result in fiduciary status, at all times when providing any financial advice (including any investment advice)? (See my prior blog post for detail as to when “advice” is provided – I encourage the adoption of Harold Evensky’s “you” test.) Otherwise, as others have written, does not the use of a term or title which denotes a relationship of trust and confidence, when none exists, result in a “bait-and-switch” and become tantamount to fraud?
Does the CFP Board Believe That Disclosure of a Conflict of Interest is All That is Required?
I firmly believe that the core fiduciary duty of loyalty cannot be waived. Even the “contractualists” (of fiduciary law theory) seem to agree with this general proposition. This is why the fiduciary duty of loyalty requires, even after disclosure occurs, that informed consent of the client occur, and even then that the transaction be fundamentally fair to the client.
In other words, courts refuse to believe that clients would consent to be harmed. At least that is not “informed” consent. (Unless, of course, you believe that clients are gratuitous, and like to gift extra fees to their fiduciary advisors to their own detriment.) Also, courts require that even with disclosure and informed consent, the transaction be and remain substantively fair to the client. If the client does not receive advice which is in the client’s best interest, by reason of subordination of the client’s interest to the desire of the advisor for more compensation, then such advice is not substantively fair.
In other words, disclosure of a conflict of interest does not negate the ongoing duty of the advisor to keep the client’s best interests paramount, and to not subordinate the client’s interests to those of the advisor or his or her firm.
But is this the way the CFP Board actually enforces its Rules of Conduct? I note the following excerpt from Bob Veres’ Sept. 9, 2014 article, appearing in AdvisorPerspectives, entitled: “What is ‘Fee-Only?’ Is the CFP Board Taking the Right Approach to Defining It?“
“[U]nder the trees at [the FPA] Retreat, [Rick] Kahler says he posed this fiduciary enforcement question to [Michael] Shaw [General Counsel of the CFP Board], who happens to be a former Northwestern Mutual life agent and NASD (now FINRA) staff attorney in an organization whose primary mission was (and is) to regulate sales activities. ‘His answer,’ says Kahler, ‘was: Rick, if I enforced the fiduciary standard on life insurance agents, I would put insurance companies out of business. I found myself wondering: who are they supposed to be protecting, the insurance companies or the public? Later he told me: I just can’t get into hair-splitting on what fiduciary is or isn’t. In some cases, those high-fee commission products may have been appropriate. My basic concern is that they disclose compensation. If they have disclosed compensation, they have fulfilled their fiduciary obligation.’ (Another participant in this under-the-trees conversation confirmed to me the accuracy of Kahler’s portrayal of it. Shaw categorically denies that he said this, though he does say that the general subject of ‘fiduciary’ was raised.)” [Emphasis added.]
I hope that this position – that mere disclosure of compensation equates to proper management of the conflicts of interest that compensation arrangements often create – is NOT the position of the CFP Board.
Yet, the CFP Board’s Rules of Conduct, though progressive at the time they were re-proposed in 2006 and adopted in 2007, appear strikingly bare in describing the parameters of the fiduciary duties of the certificant. This leaves the door wide open for various misinterpretations.
I served as Reporter for the Financial Planning Association’s Fiduciary Task Force in 2006-7, which issued a lengthy report. Since the time of that report, in large part due to the ongoing legislative and regulatory debates about whether to apply the fiduciary standard (by rule) to brokers who provide personalized investment advice, we now possess a much greater understanding of what the fiduciary standard is all about, and what it requires. In essence, the CFP Board’s 2007 Rules of Conduct are now outdated, and require revision.
Should We “Rally Around” the CFP Certification? Should the FPA?
Michael Kitces alludes to the “rallying” cry around the CFP Board’s marks, in a fairly recent blog post (Could The FPA’s Waning Power Given Its Declining Market Share Of CFP Certificants Lead To Its Untimely Demise? – Kitces.com http://www.kitces.com/blog/could-the-fpas-waning-power-given-its-declining-market-share-of-cfp-certificants-lead-to-its-untimely-demise/). A response from the FPA occurred, followed by a response from Michael (both found at http://www.kitces.com/blog/why-im-so-critical-of-the-fpa-that-i-support-and-the-fpa-leadership-responds-in-writing/).
Further commentary thereon has been provided by Bob Clark (Should the FPA Get Behind the CFP Board, or Go It Alone? ThinkAdvisor www.thinkadvisor.com/2014/10/29/should-the-fpa-get-behind-the-cfp-board-or-go-it-a). Also see Bob’s more recent post: http://www.thinkadvisor.com/2014/11/05/why-the-fpa-cant-win-in-the-broker-market.
While the discussion involves many aspects of the history of the Financial Planning Association and its relationship with the CFP Board, I believe the focus of any discussion by other industry organizations (FPA, NAPFA, and perhaps others) should be simply this: Are the CFP Board’s Rules of Professional Conduct, as written and as applied and as enforced, sufficient to constitute a bona fide fiduciary standard, thereby entitling consumers to look toward all CFP Board’s certificants as THE source of trusted, objective, expert (and fiduciary) advice?
In Search of the Marketplace Solution.
As I related in my prior blog post, a recent survey demonstrated that many consumers do not use financial advisors, of any kind, because they don’t know if they can trust any of them.
I would prefer that the SEC reverse its policies of the last few decades and draw a meaningful and sensical line between sales and advice, and prohibit the use of titles which denote relationships of trust and confidence by “pretend advisors” who do not abide by, or disclaim away, the fiduciary duty of loyalty. Yet, given the substantial influence by Wall Street over the SEC, I doubt this is possible, in the current political climate. Especially given the influence by Wall Street over Congress, which in turn exerts its own influence on the SEC.
Hence, we must come up with a marketplace solution. I ask again – is the CFP Board the solution, around which we should all rally? I cannot at this time bring myself to that conclusion, as the CFP Board’s application of its fiduciary standard seems to be hole-ridden and weak. Without a substantial revision of its standards, these discrepancies will continue to exist.
As a profession, we must ask – WHO DO WE SERVE? Many a jurist has opined that a fiduciary cannot serve two masters. If we truly serve clients, as their trusted advisors, we must embrace fiduciary standards under which that trust cannot be betrayed by particular exceptions or by the non-application of the standards to the delivery of professional advice.
The Financial Planning Association long ago embraced the CFP mark as the mark of the “profession.” Yet, as the Financial Planning Association has apparently moved over the past 15 years or so toward greater service to the public and the embrace of fiduciary standards, over the past several years the CFP Board has seemingly moved in the opposite direction. The CFP Board has possessed significant targets for expansion of its number of certificants. Many have suggested that this broader base of certificants includes many who are primarily engaged in insurance and security sales, not the delivery of advice. And commentators have opined that many large broker-dealer firms and insurance companies have embraced the CFP Board, yet have also pressured the CFP Board to not apply or enforce its fiduciary standards.
This has placed the Financial Planning Association in a difficult position. Even though the FPA split off its brokers into a different organization many years ago, and then the FPA put its resources into defeating the SEC’s ill-advised “fee-based accounts” rule, the FPA’s past embrace of the CFP mark may not now be appropriate, given the CFP Board’s evolution over the past several years.
I can hear the rebuttals already. Organizations might be inclined to reply that they continue to support the fiduciary standard as found in the Advisers Act. Yet, as I’ve stated previously, that Advisers Act’s fiduciary standard has itself been eviscerated by the SEC, either expressly (through particular exceptions) or through de facto rule making via non-enforcement. As a profession we should not calibrate our standards to the weak standards of a regulator, but rather we should adopt a standard which justifies the placement of trust and confidence by consumers in the members of our profession.
Hence, I would ask the following of any organization which seeks to reply … Would you agree that your members (or certificants, or designees) should all sign the “Fiduciary Oath” (as promulgated by The Committee for the Fiduciary Standard, and as re-printed in my previously blog post)? And, just as importantly, would you also agree that the 18 specific principles (or rules) I set forth in my previous blog post are firmly entrenched in your own standards? Would you be willing to adopt, in writing, those specific standards – for the benefit of both advisors (to ensure their understanding of the bona fide fiduciary standard) and for the benefit of the consumers they serve?
(In essence, I request that your organization does not reply with mere talking points and flowery general statements. If you choose to reply, be very clear and state whether your organization believes in, applies, and enforces the bona fide fiduciary standard I previously set forth.)
In a larger view, this is an old question that has haunted the “profession” since its inception (with sales roots) – are we, today, “advisors” or are we “salespersons”?
Only if we become bona fide fiduciaries will we be deserving of the trust and confidence of the public, and all of our clients. Until then, consumers won’t trust us. Our profession will not achieve status as a “true profession” serving the public interest if we possess members who eschew bona fide fiduciary standards. Nor will we deserve legislative recognition as a profession. In short, the distrust which so many consumers possess of all “financial advisors” and “financial planners” may continue to occur, and be justified, at least at the professional organization level. Of course, this affects all of us.
I ask again … what organization (non-profit or profit), or set of standards, deserves to be rallied around as a foundation for a true profession?
A related question arises, as we seek to move forward in the development of a true profession in which each of member of the profession is deserving of the trust and confidence of consumers (through adherence to bona fide fiduciary standards) … What organizations, due to the weakness of their standards or inappropriate non-application of their standards, risk becoming irrelevant?
UPDATE: 12/4/2014: Bob Clark opines on one of my recent blog posts: Why Aren’t CFPs Always Subject to a Fiduciary Standard? www.thinkadvisor.com/2014/12/03/why-arent-cfps-always-subject-to-a-fiduciary-stand?t=the-client http://fw.to/0AzoNBS
April April has been declared Financial Literacy Month. Because today is April 1, I thought we could start off with a list of the reasons why April has been dedicated to financial literacy, following the example of other famous top ten lists.
- Because financial literacy is important!
- Because what else would you rather do in April?
- Because years, centuries, and millennia were already taken.
- Because April was not dedicated to another topic yet.
- Because a week would not have been enough.
- Because choosing a financial literacy day would have been really difficult (which one out of 365?).
- Because the spring- with good weather and longer days- is when we are inclined to start new things.
- Because financial literacy can blossom like a spring flower.
- Because in April we have to pay taxes and we can take some comfort in thinking of something worse than taxes: the statistics about financial illiteracy!
- If we dedicate a month to financial literacy, we do not have to do anything else for it.
Dear (Financial Consultant Name):
I have truly appreciated our relationship over these past years. I don’t know how you did it, but you earned my trust quickly. And, while I don’t understand much about “the market” or what you do, it appears you are doing well for me.
I remember that shortly after I first me you, I signed what seemed to be dozens of forms when I opened accounts with you. However, I don’t recall much of what I signed. When I questioned you about it recently, you told me not to worry – that you were legally obligated to act in my “best interests.” In fact, you said that FINRA, your regulator, requires that you do so.
Still, I must confess, I don’t understand what you do, or how you get paid. I’ve never received a bill from you, for everything you’ve done for me. I appreciate that, but it also got me to wondering.
I recently came across this set of questions, from Professor Ron Rhoades, who writes a lot about financial advisors and trust. In fact, I think he uses the word “fiduciary” a lot, though I don’t understand what that means, etiher.
But what Prof. Rhoades does suggest is that I, as your client, and at a minimum, fully understand any conflicts of interest you possess, whether you properly manage those conflicts in my best interests, how you get paid, and all of the fees and costs associated with the investments I possess. Hence, I thought I would ask you the following series of questions, as he suggests.
Can you answer these questions for me? Also, can you put your answers in writing? (Prof. Rhoades strongly suggest that I get all of your answers in written form, so that I can contemplate your answers and, if advisable, seek a second opinion.)
Here’s the “short list” – as he calls it, designed to test whether you deserve the trust I place in you:
(1) Do you possess the legal obligation to act in my “best interests”?
a. Is this the “acting in the client’s best interests” requirement you adhere to arising out of a fiduciary-client relationship? I feel I am in a relationship of trust and confidence with you. Prof. Rhoades advises that, if this is the case, I should ensure that you possess broad fiduciary duties of due care, loyalty, and utmost good faith toward me. Do you? If your written answer to both of these questions is “yes” – please proceed to questions 2, 3 and 4.
b. Or, is this only FINRA’s “best interests” standard? Prof. Rhoades advises that under FINRA’s “best interests” standard, your duties to me are very low – and that the extremely low standard of “suitability” applies. If your answer to this question is in the affirmative, please go no further in providing answers to me. Prof. Rhoades advises me to obtain a second opinion about my investment portfolio, from an expert, objective, independent fiduciary investment adviser – preferably a “fee-only” advisor. [For more about the failure of the “suitability” standard and how FINRA’s “best interests” standard – including one now proposed – does not REALLY protect me fully, please review this prior blog posting by Professor Rhoades.]
(2) With respect to each conflict of interest you may possess, in our relationship, arising from your activities or the activities of your firm, please explain to me how you have, in the past, ensured that you have observed the following procedures to properly manage each conflict of interest in order to ensure that no harm comes to me:
(A) Did you previously disclose the conflict of interest to me? Specifically, so that I can discern whether I remember your disclosures to me, please explain to me all material facts regarding the conflict of interest. Also, please discuss in your answer what potential ramifications this conflict of interest may pose for me, if it is not properly managed.
(B) What steps have you taken to ensure that I fully understand the conflict of interest you possess, and its ramifications? (Prof. Rhoades states that you possess the burden to ensure that I understand any conflicts of interest you may possess. Prof. Rhoades also states that my complete understanding of each and every conflict of interest you possess, including the ramifications of each conflict of interest, is a prerequisite to my providing “informed consent” as set forth below.)
(C) Please indicate where and when I provided “informed consent” to the conflict of interest. Did you record my “informed consent” – which I understand may be verbal or in writing (as to most conflicts of interest).
(3) With respect to each conflict of interest you may possess, in our relationship, arising from you activities or those of your firm, is each transaction you recommended that I undertake (as to those transactions which might be affected by such conflict of interest) also “substantively fair” to me, as is required under a true fiduciary “best interests” standard?
(4) As a further test of your ability to properly manage any conflicts of interest you may possess, please provide your answers to the following questions, in detail:
(A) What are the total fees and costs associated with each investment product I have purchased as a result of your recommendations. Please list the total fees and costs associated with the first year (such as sales commissions), along with any ongoing fees (in the first and subsequent years). Please express, for each product, the total fees and costs as both a percentage of the amount invested, and as a dollar amount, for the first year of the investment and each calendar year since then. If you are estimating any of these fees and costs, please let me know. And, if certain fees and costs cannot be quantified, please explain why.
(B) Please set forth the compensation received by your firm as a result of any recommendation from you which I have implemented. Please specifically indicate, for each investment product:
1. Any front-end sales load or commission paid
2. Any contingent deferred sales charge or redemption fee that I may have incurred
3. Whether any contingent deferred sales charges or redemption fees may still be incurred by me, if I decide to sell any investment you have recommend to me.
4. The amount of ongoing, annual compensation your firm receives from the product provider, such as:
a. 12b-1 fees
b. Payment for shelf space, or any other revenue-sharing payments
c. Brokerage commissions paid to the firm by the investment product provider, as a result of your firm acting as broker for transactions within the product, and whether any of such brokerage commissions were “soft dollar” compensation
d. An estimate of any “payments for order flow” your firm may have received
5. The amount of any investment advisory fees I have paid to your firm each year
6. Any other payments your firm may have received as a result of recommending the investment product to me
7. Please also state whether any of the compensation your firm received was potentially higher due to sales by your firm of how much investment product was sold, and if so please describe the arrangements in detail.
(C) Please also set forth whether you received any material compensation as a result of your recommendations to me.
1. Please indicate the amount of such compensation, for each year of our relationship.
2. Also, please indicate if you possessed any incentives, which would have resulted in higher commissions or other payments or bonuses, gifts, treatment to trips, or any other material compensation, in connection with the investment recommendations you made to me. Please discuss in your answer the particulars of such incentives.
I know this is a long list, and it may take you several days to compile this information. But, Professor Rhoades notes how very important it is to obtain answers to these questions.
P.S. – Prof. Rhoades suggests other questions I may need answers to later, in this other prior blog post. Hence, I may be asking you more questions, later, as I continue my research and seek to ensure that you are truly acting in MY “best interests,” and not your own.
Michael James’ tongue in cheek The Stock Picker’s Checklist prompted me to look at one of my accounts at TD where I have bought individual stocks as part of my overall Canadian equity allocation.
On first glance, the screenshot below of my account return against the TSX Composite Index Total Return (which is the appropriate benchmark since the account is entirely Canadian equity holdings and all the stocks, and the holdings of the one ETF, are part of the TSX Composite) makes me look like a rival to Warren Buffett and Charlie Munger.
… but the sudden divergence of the lines around September 2014 made me look a bit closer and the source of the marked difference is the sole ETF in this account, BMO’s Low Volatility Canadian Equity fund (TSX: ZLB). ZLB contains much less weight in energy and materials by virtue of its criteria to select low volatility stocks.
The following chart from Yahoo Finance shows ZLB against the TSX Composite and a couple of other ETFs – iShares’ XIU, which tracks the TSX 60, and Powershares’ PXC, which is a fundamentally-weighted Canadian equity fund. PXC has closely tracked the pattern of the TSX while doing appreciably worse. Meanwhile ZLB works completely differently.
The TD account balance screenshot (edited to remove dollar amounts of my holdings, which unfortunately are nowhere near rivalling those of Buffett and Munger) confirms this. ZLB is about half the holdings and its gain is far ahead of anything else. Its return has dominated the account.
1) My stock picks so far have been doing about the same – no better but no worse either – than their benchmark. Not much benefit or harm either way.
2) ZLB’s low correlation with PXC and the TSX Composite indicates that a portfolio built to include non-cap-weight components (like the Smart Beta described here on my other blog) makes sense. The last three years, market conditions have been such that ZLB is powering ahead. At some point, it will be PXC’s turn. All along my portfolio is more stable / less volatile.
Handing over a large lump sum out of your life savings to an insurance company to buy a lifetime stream of income in an annuity is a sobering step. It is irreversible. A critical question, considering that your retirement can easily last 30 years or more, is whether the insurance company will be able to carry out its promise to pay. How sure can we be of actually getting those payments?
Protection level 1: Assuris – the backstop for failed insurance companies
As the Assuris website explains in more detail, all companies selling annuities in Canada are required to be members of Assuris, which does a very useful thing. It guarantees up to $2000 per month (or equivalent quarterly or annual amounts) in annuity income, or 85% of income, whichever is higher. It is on a per company basis so it is wise to pick different insurance companies for income above $2000 per month. Thankfully, one of the Assuris FAQs advises that if companies subsequently merge the guarantee continues on the previous basis, i.e. independently and not combined.
The ability of Assuris itself to carry out its guarantee is based partly on keeping a $100 million fund. That’s not much at first glance considering the amount of outstanding annuity obligations – e.g. even a small player like Equitable Life had $456 million in outstanding annuity contracts in 2013 per its Annual Report. However, the $100 million fund is importantly supplemented by Assuris’ power to levy all its insurance company members for any shortfall. Given that a failing insurance company would most probably still have considerable assets to pay a good chunk of its annuity obligations the net shortfall from the fund and the levy would seem fairly limited.
Assuris has been effective so far in its 25 years of existence. The four insurance company insolvencies in that time resulted in no losses to Assuris-covered customers and only miniscule losses to some non-covered customers.
Protection level 2: OSFI Regulation – a strict culture of caution
The second reason that annuity holders can find considerable comfort is the strict regulatory regime for insurance companies in Canada, as carried out by the federal government’s Office of the Superintendent of Financial Institutions. There are requirements for companies to maintain high levels of capital to withstand financial shocks. All the major insurance companies exceed the OSFI recommended level by a large degree, let alone the legal minimum. A recent International Monetary Fund Review of the effect of the harmful low interest rate environment on Canadian insurance companies notes that the regulatory regime in Canada has forced the companies to make required adjustments. Various standards are being revised to improve safety. In the IMF’s words “The regulatory regime has served Canada well in the adjustment to a low rate environment“. Any future rise in interest rates will benefit companies.
It is reassuring to remember that though insurance companies suffered in and after the 2008 financial crisis, they weathered the storm. One failed but the Assuris guarantee worked. The current solidity of the Canadian insurers is reflected in their high credit ratings shown in this February 2015 compilation of the annuity issuers by McGill University. Some, like Canada Life with AA ratings, are higher rated than a weaker province like New Brunswick with only A(high) from DBRS. A culture of caution in Canada, that seems to be continuing, reassures for the future.
Protection level 3: Politics, a possible potent wildcard
“Too big to fail” and “too many voters” adds another dimension, possibly the most powerful of all, to the likelihood that annuity holders will not be left high and dry by insurance company failure. It is hard to imagine that, in the face of a single company failure that Assuris could not cope with, which would entail one of the huge companies such as Manulife or Sun Life, the federal government would not step in to bail out the millions of life insurance holders. Systemic risk domino effects on other companies and on banks might force the issue.
All in all, it seems that the safety of annuities in Canada is pretty darn good. There’s no certainty that things cannot or will not change (is there ever?) but the situation looks very solid at the moment. It’s one worry I will not have about my annuity purchase.
2014 was an outstanding year for Canadian financial advisors according to PriceMetrix. It could be termed the year of the Yacht (making reference to the classic takedown of Wall Street Where are the Customers’ Yachts? by Fred Schwed) for advisors. That’s not just figuratively true, it is literally true. Anyone who makes $655,000 in a year is into yacht territory. Yes, that’s right, the PriceMetrix press release crows about that being the average advisor income, not the top 1% or 10%, the average!
Advisors are doing well indeed – their 13% rise in revenue over the previous year contrasts with only an 11% increase in average client assets under their management, all this while advisors have been reducing the number of clients each deals with, i.e. the advisors have been firing clients, and it doesn’t take a rocket scientist to know it is the clients with low assets who provide less revenue bang for each advisor time buck.
There is an increasing shift to fee-based revenue (which probably means a separate charge for assets under management but might include trailing commissions on mutual funds), as opposed to transaction revenue (one-time commission). It’s hard to tell exactly what types of charges are being described – see Preet Banerjee’s more detailed run-through of various terminology for various charges on MoneySense – but the end result is clear, clients of advisors got dinged for more per dollar of invested assets in 2014.
Another interesting figure in the PriceMetrix report is that each advisor served 150 clients on average. In a typical year of 236 on-the-job days (251 working days minus 15 for holidays on the yacht), that gives each client 1.6 days of advisor time per year, discounting anything else the advisor does in his/her business. No wonder $20,000 client accounts don’t pay and advisors want to get rid of such clients (1% of $20k provides only $200 and 150 of such clients is $30,000 of annual revenue).
Finally, perhaps robo-advisors really are the way of the future. The report says advisors and their clients are getting older. Advisors are making no efforts to attract younger clients, who may not be interested anyway since they can get all of what typically passes for financial advice (10 simple questions and your portfolio is determined) plus automatic rebalancing for a lower cost (using lower MER ETFs plus lower robo charges on assets) from the robos.