The fiduciary standard is one of those subjects that can spark heated conversation in a room full of financial advisors. It is a topic du jour at industry conferences and in offices across the wealth management industry; it is the theme underlying a recent scalding editorial written by departing Goldman Sachs employee Greg Smith, who accused Goldman of profiting by ripping off its own clients. If you are reading this magazine, you probably already know what this vaunted standard requires: all investment recommendations must put client interests first. You probably also know that today, investment advisers (RIAs) are held to the standard, but brokers generally are not. As long as what brokers recommend is “suitable” for the client, they are off the hook.
All this may change under Dodd-Frank regulatory reform, signed into law in July 2010. The Department of Labor is authorized to write new rules harmonizing regulation of brokers and advisers who advise on retirement accounts and is considering subjecting all IRA accounts to the fiduciary standard, while the Securities and Exchange Commission is authorized to write a rule extending the standard to brokers. The brokerage industry is fighting the former tooth and nail, but has said it supports the SEC fix as long as it's “business-model neutral” — what this means in precise terms has not necessarily been ironed out. At this point, the DOL rule is getting bipartisan pushback in Congress while a new SEC rule may be a year or more off. (See sidebar on p. 40.)
Apparently, Wall Street isn't waiting to see how the rulemaking turns out. Brokerage giants like Merrill Lynch and UBS have been minting fiduciaries left and right over the last three years, though it's unlikely you've heard about it. None of the firms will go on record as to whom specifically in the rank and file is adopting the standard, nor will they provide much detail on what that training looks like.
And yet, Fi360, an outside vendor that specializes in fiduciary training, says at least three of the big four wirehouses (it won't say which ones) have invited it in to conduct classes for advisors who serve retirement and discretionary accounts, and interest is accelerating. Rival training firm 3Ethos also says it is in talks with wirehouse firms and other broker/dealers to offer classes. Industry consultant Cerulli Associates backs them up on this. Plus, a number of Merrill Lynch sources say Merrill is rolling out its own internal fiduciary designations — for both retirement and high-end retail advisors — and requiring them to get outside training to qualify. Holding the internal designations would allow these advisors to tell clients they are acting in a fiduciary capacity.
The moves may reflect more than the regulatory shift happening in Washington. Wirehouses are also adapting to larger industry trends; namely fee pricing and comprehensive planning models, both of which require a fiduciary approach. Smaller investment adviser boutiques, which are increasingly stealing advisors and assets from Wall Street firms, already tilt heavily towards fee pricing and comprehensive planning, and act as fiduciaries. Most wealthy investors these days want a pro who will look at their entire financial picture and give them unbiased advice rather than sell them products. Who will be satisfied with a financial advisor whose decisions will be merely “suitable” when others promise to put them first? That is, if they understand the difference.
Here's the confusing part. Who is held to what standard and when is actually a pretty murky business. Today, all advisers and brokers must adhere to the fiduciary standard when they provide financial planning for a fee on assets, when they take discretion over client accounts (make individual investment decisions without explicit client approval) and when they offer advice on certain kinds of retirement accounts (not including IRAs). Those advisors who hold a certified financial planner (CFP) designation, which accounts for about 15 to 20 percent of wirehouse advisors according to Aite Group research, are also expected to adhere to the fiduciary standard.
But brokerage accounts and product sales (as well as “free” financial planning) are governed by the suitability standard, unless there is some disclosure that says otherwise. Meanwhile, many advisors are dually licensed and switch hats, playing a dual role with a single client; this is typically governed by account contracts.
Regulators don't endorse any of the fiduciary certification companies out there, but adhering to a fiduciary standard can be complicated, and often training can help. “I think advisors have a hard time knowing what playing a dual role means, and so there is an effort to clarify that” with training, says Scott Smith, an analyst with Cerulli Associates. “Plus, if a universal fiduciary standard is rolled out, the firms will be under an obligation to make it clear to their advisors what it means to put their clients first and what all the decision points would be,” he says. “There is a level of defense here. ‘We brought in the experts.’ I think they want to make sure they have an outside opinion.”
Fi360, one of the biggest players in the fiduciary certification and training market, whose AIF (Accredited Investment Fiduciary) and AIFA (Accredited Investment Fiduciary Analyst) certifications have been around for over a decade, reports a major bump in interest in its courses from the big Wall Street brokerage firms. According to founder and CEO Blaine Aikin, the number of classes the firms have signed up for has more than doubled every year since early 2009. That's a faster rate of growth than for any other advisory channel his firm works with, including RIAs and independent broker/dealers, he says. One wirehouse put 500 of its advisors through the Fi360 program in October of last year.
“The balance has shifted,” says Aikin. The growth on the wirehouse side is coming off a low base, but has been “extraordinarily rapid.” The firms are starting with advisors who work on retirement accounts, but also training those who take full discretion over client accounts, says Aikin. (Such discretionary accounts are a growing phenomenon.)
Don Trone, founder and CEO of 3Ethos, which offers its own GFS (Global Fiduciary Strategist) certification, says he is also seeing a lot of interest in his training programs. Trone, one of the architects of Fi360, just launched 3Ethos late last year after his non-compete with Fi360 expired. Since then, he has met with about 15 to 20 major firms, including several wirehouses and major b/ds. “We're probably conducting a major accounts presentation about once a week,” he says.
Another player is Fred Barstein, founder and executive director of The Retirement Advisor University, who developed the C(k)P (Certified 401(k) Professional) designation. Merrill Lynch requires that its retirement-designated advisors enroll in Barstein's program, according to a source at Merrill.
“In a different era they might do the training themselves, but these days there are resource constraints,” says Barstein. And then there is the matter of continuing education. “These days, not just in financial services, firms are reluctant to take on full-time employees to create training departments, because if times get bad you have to lay off people, cut back.”
One Merrill Lynch advisor who does primarily institutional and retirement business says Merrill just started sending retirement-designated FAs through outside fiduciary training programs a year ago. And in the next couple of months, Merrill will create an official firm-sanctioned “fiduciary advisor role” for its retirement and philanthropy groups, as well as its institutional consulting group, which serves high-net-worth retail clients, says this advisor, who requested anonymity because he is not permitted to speak for the firm.
Some advisors in these groups are already permitted to tell clients they are fiduciaries, but will be required to undergo a new and rigorous assessment process to continue doing so. The advisor thinks that Merrill will eventually make similar fiduciary training and offerings available to advisors who serve lower-end retail clients; that may come at a cost to the client, however, he says.
The Merrill advisor and his partner, who focuses on retail clients, got the AIFA on their own a decade ago. “We think we're a little ahead of the curve,” he says. As a result of the program, his team made client costs the focus of their practice. Growth, which had flat-lined prior to the course, quickly ramped up to around 16 to 17 percent a year and stayed there as new clients flocked to the business. “We are very cost-conscious. Fees matter. We think driving down costs on institutional and retail business has led to growth.”
The firms are tight-lipped on the subject of fiduciary training. Morgan Stanley, Merrill Lynch and Wells Fargo said they have their own internal fiduciary training. They do not allow their financial advisors to use the outside vendors' designations on marketing literature, business cards or in conversations with clients, they said. They were reluctant to say much more and would not make executives available for interviews.
Merrill offered a few details, however. Spokeswoman Selena Morris says the firm rolled out fiduciary training so it could “be prepared when rulemaking on a uniform fiduciary standard comes down.” Advisors in Merrill Lynch's Personal Investment Advisory (PIA) program, which allows them to take discretion over client accounts, must get training in fiduciary responsibility, among other things, she says. And PIA is growing: the firm has 4,300 financial advisors in the program, up from 3,700 at the end of 2009. In addition, Morris confirmed that Merrill accounts with a fiduciary-advisory component are governed by contracts that spell this out.
But the other firms were less forthcoming. In response to questions about how many of its brokers are fiduciaries and in what capacity, Morgan Stanley would only say that because it is dually registered as a broker/dealer and an investment advisor, the majority of its FAs are also dually registered — licensed to conduct both fiduciary fee and suitable commission business. Wells Fargo said that “a significant percentage of our 15,000 FAs act in a fiduciary capacity in the context of advisory relationships.” UBS did not respond to requests for comment.
“Wirehouses don't want there to be confusion on the part of the client because the FA is not always a fiduciary,” Aikin speculates. “Most FAs are dually registered so sometimes they are operating in a fiduciary capacity and sometimes not.” This point was echoed by another industry source who declined to speak on the record.
Making it known that your brokers are fiduciaries could also invite lawsuits, one lawyer says. “They don't want it out because they don't want to give anxious plaintiff attorneys an opportunity to start suing,” says Stephen H. Cohen, who represents broker/dealers as a New York partner at Loeb & Loeb LLP. “They may just be trying to create a culture of helping FAs to know how to be a fiduciary, so that when the law comes out, the reps are prepared. But once it gets out that you have the policy, you could be held to it.”
Cerulli's Smith agrees. “They're worried about greater liability in any fashion,” he said. Lawyers might ask, “‘Why are you doing this now? Why didn't you do this before?’ Plus, the standards that were proposed last year under the DOL kind of scared everybody. There were a number of high-fee 401(k) plans that thought they were being overcharged, who sued on behalf of all the participants. In those cases they go after the people with deep pockets, the b/ds or the record keepers. If you make a mistake on behalf of 5,000 employees, that's a problem.”
It could even jeopardize the industry's lobbying efforts in Washington, Trone says. “While industry groups lobby their positions with the SEC and DOL, no FINRA-member firm wants to take the risk of appearing to be stepping out of line. FINRA-member firms have legitimate concerns about the potential risks of a fiduciary standard, and until those risks are fenced off with ‘fiduciary safe harbor procedures’ prescribed by the SEC and DOL, no one is going to budge. It's the same direction you get from your attorney when you're the subject of litigation — ‘don't say a word; you may jeopardize your case.’”