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How will Fiduciary standards affect compensation?

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Jul 28, 2010 8:42 pm

Logically, it seems that fee-only accounts would eliminate any financial incentives for a Financial Advisor to make a recomendation on an investment. However, according to an article I just read, If the gov't does decide to implement fiduciary standards, that doesn't mean the elimination of a commission-based pay structure. Can someone clarify this for me?

Jul 28, 2010 11:49 pm

If the SEC goes through with this, which is questionable, brokers could still sell commissioned products.  Only now the standard would be raised from products that are merely suitable for the investors to those that are in the client's best interest.  In theory, the brokers would need to recommend lower cost alternatives if they are clearly equivalent to the higher cost products they've been pushing, er, selling.  But that leaves a lot of wiggle room over what's equivalent.  Personally, I would think the fiduciary standard would eliminate most commissioned products from consideration, but that's my RIA bias showing.  In the real world, I don't think this would change a thing.  While the RIA will still have the moral highground on compensation structure, the clear marketing edge of the fiduciary standard will be diluted.  We might end up with more clients remaining with B/Ds and receiving the exact same "service" they are getting today.  That would be a lose-lose for clients and RIAs and a net tie for B/Ds, who would now likely be getting more business but facing more lawsuits.  Geez (I really wanted to use a stronger word here), I think I just discovered that the lawyers are the only winners, AGAIN!

So, counter-intuitively, I am hoping the SEC does not enact the fiduciary standard for brokers.

Jul 29, 2010 12:08 am

Interesting. It makes sense why you would be opposed to this. It is hard to argue about the "fiduciary advantage" that RIAs have over the B/Ds. Is it realistically possible to implement a fiduciary standard and NOT change to a fee-only compensation structure?  if I am choosing between two bonds and both have same safety, maturity, etc. one has a comission of 0.2% and another with a charge of 2%, I would be required to sell the 0.2%.  I would go out of business, unless there was another form of compensation. I just don't see how a commission based compensation plan would work with a fiduciary standard. I could see the Gov't forcing firms to offer a fiduciary standard and for clients that prefer the old method, have them sign disclosures stating that they understand their advisor does not have a fiduciary standard for their account. Hell, I don't know.

Jul 29, 2010 12:14 am

I don't know either.  I can't do anything about it until it happens, so I'll try not to worry until then.

Jul 29, 2010 1:46 pm

You can voice your opinion on the SEC website.Here is the link:

The time is now to speak your mind. I would carefully word any comments. You never know who is watching.

Madman: I think your comments are interesting. Most RIA's seem to be pushing for fiduciary. It seems they feel it would level the playing field a little. I am still somewhat undecided. I am dually licensed and can see both sides. I still think they should be targeting Insurance agents as well. They will still be able to run around with limited suitibility and a 30 day lookback as their standards. That seems to bother me more then a broker moving to an IA type role.

Jul 29, 2010 1:54 pm

Fee-based options aside, I think we are moving to a more standardized commission structure.  In the MFD world, C shares are essentially going away (not completely, but there would be little incentive or reason to sell them anymore).  And A shares generally have the same commission structure (marginal differences among families).  However, it may bring higher scrutiny to breakpoint utilization.  There is no clear direction on breakpoints.  At Jones, it seems as long as you hit 100K breakpoints, you are left alone.  We are actually developing a system for building, buying, and auto-rebalancing A-share portfolios.  It might look similar to and advisory product, but with a commission instead of a fee.  This would be part of addressing the fiduciary standard.  I believe it will be harder and harder (from a compliance standpoint) to simply sell products one-by-one (versus appropriate portfolio solutions).  If there is a fiduciary standard, I would be hesitant to call a client/prospect and sell them one stock or one bond, without having their entire investment and financial picture in my hands.

The new standards will help on one hand, but I also believe it will negatively impact smaller clients in the short term (less incentive to service them).  IN the long-run firms will come up with solutions to address the needs of smaller clients.  However, not all small clients are really well suited for packaged solutions like advisory accounts and complete balanced portfolios.