During a hearing of Maryland’s general assembly on Wednesday, several advisors made the case that the state's proposed bill mandating they be held to a fiduciary standard would adversely impact their smaller clients’ access to financial advice and impose an unnecessary layer of regulation on their practices.
One advisor, Larry Leitch, co-founder of Synergy Financial Group in Towson, Md., said his firm has already decided not to do business in Nevada, another state considering a fiduciary rule, and may have to do the same in Maryland.
“We’re licensed in over 30 states, and if we see this patchwork continue, we’re going to have to make that tough decision going forward,” he said.
Leitch said most lower and middle-income investors use the services of a broker/dealer, a role which would be placed under a fiduciary mandate in the new rules. His firm has over 6,800 accounts in Maryland, 5,500 of which are small enough that a brokerage relationship makes the most sense, he said. LPL Financial is his broker/dealer.
“We’re concerned that it’s going to be difficult for us to serve those small accounts in light of these uncertain added costs and risks.”
State Senator Jim Rosapepe introduced the Financial Consumer Protection Act of 2019 in Maryland, aimed at strengthening consumer protections, and includes a section establishing that certain professionals are fiduciaries, including broker/dealers, broker/dealer agents, insurance producers, investment advisors, federally covered advisors and investment advisor representatives.
Under the legislation, fiduciaries are required to act in the best interest of their clients, without regard to financial or other interests of the person or firm providing the advice.
Willie Franklin, managing principal of Hunt Valley, Md.-based Franklin Financial, said he was also concerned he wouldn’t be able to serve smaller clients under the new rules, many of which can’t afford to pay a fee on assets under management. One of his small business clients recently asked him to meet with two new employees to talk to them about retirement.
“When I go into those meetings, it’s often the only time employees like that have the ability to talk to a qualified financial advisor about whatever topic they’d like to discuss,” he said. “If I’m held to a fiduciary standard, I will no longer be able to do that without charging a fee. The reality is, technicians won’t pay a fee because they can’t afford to pay a fee.
“They’ll continue to be part of that grossly underserved market,” he said.
Don Moore, managing principal at Chesapeake Financial Strategies in Greenbelt, Md., said the rule would make it more difficult for him to serve his clients with multiple generations.
“My concern on this bill though is, I got a call from one of my retired FBI guys, and he’s thinking of moving to Nevada. I said, ‘Great. How about New Mexico? That’s a nice area,’” Moore said, jokingly, referencing Nevada's fiduciary legislation.
The client’s grown children live in Texas, while his mother is in Chicago.
“My point is, it’s going to be very difficult to manage these things, and I don’t want to have to de-couple one part of that family unit because I can’t keep up with all the regulations,” Moore said.
When questioned by state Senator Edward Reilly, Moore indicated that he was licensed in 38 states, none of which have this type of requirement. But he is also under FINRA regulation.
“The point being, Mr. Vice Chair, is they have plenty of oversight,” Reilly said. “I would strongly find a way to work and exclude these and the other fine professionals who already have plenty of regulation on their shoulders.”
Baltimore-based financial advisor and insurance broker Brian Jolles told a story about a 90-year-old client, who recently died.
“I made a promise to him at 76 when I was introduced to him by an estate planning attorney that I would help him with his goals,” Jolles said. “In many cases it’s commission products that are going to solve those needs. Because of my ability to offer those products and services, he died peacefully.”