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Regulators Must Distinguish Financial Advisement from Investment Advisement

How illogic in DOL’s Retirement Security Rule produces a crisis of identity for insurance professionals.

To an insurance-loving logician, the framework of the Department of Labor’s Retirement Security Rule, in which future recommendations made to retirement savers are viewed nearly solely through the lens of investment advice, is logically problematic.

The regulatory conflation of “wealth/financial” with “investment” dates back to 1987, and it inherently disadvantages the insurance (liability minimization) industry. It also harms the wealth accumulation and retirement income optimization of American retirement savers, not all of whom will always desire to be investors.

Amongst financial professionals, only investment advisors routinely sell investment advising, and only advisors can “sell” (receive compensation for) advising. In this 2022 piece, I explained in depth my belief that advisors sell advising (verb), while agents and brokers sell products (nouns). No form of financial professional sells advice (noun). Reg BI polices who can hold themselves out as financial or investment advisors, but there is no codified frame for what it means to be an “insurance advisor,” which means anyone can claim to be an insurance advisor, irrespective of credentials.

In 1987, the SEC determined to govern financial advisement under the Investment Advisers Act of 1940 (“40 Act”). As a result, recurring advisory compensation is based largely on AUA/AUM, which is the opposite of the insurance industry’s value proposition (minimizing liabilities). This warped reality drives suboptimal American retirement outcomes because an investment advisor acting in a fiduciary capacity can absolutely be a fiduciary in the field of investment advisement (which means asset maximization subject to risk tolerance constraints) while not at all being a fiduciary in the field of wealth management. In reality, investments are a subset of financials/wealth. To govern financial advisement, the more expansive frame, under the narrower lens, results in advisory prioritization of near-term asset maximization rather than long-term wealth sustainability. Balancing short- with long-term wealth priorities is critical to insurance’s role in financial planning, which is a discipline distinct from investment advising.

Insurance industry researcher Wade Pfau routinely teaches that tolerance for the “risk of running out of money and becoming a burden on my heirs” is not a question that is assessed on a standard investment account RTQ. Many, though hardly all, retail RIA investment advice fiduciaries are also financial planners. Financial planners do need to consider liability minimization as part of wealth maximization, but financial planning being regulated under the 40 Act creates consumer confusion around which service they are paying for.

Investment advisors are responsible for managing properly to an investing mandate; they are not responsible for whether the client’s portfolio, managed to that mandate, lasts through the client’s retirement. That is why investment advisement is not the logically correct regulatory lens for financial planning. An asset manager’s GIPS-compliant performance metrics do not include reporting on cash flows into and out of the portfolio (such as for the provision of retirement income). Accordingly, irrespective of how frequently clients’ portfolios may run out of money in retirement, AUM-billing investment advising fiduciaries remain entitled to call themselves fiduciaries to their customers, who might imagine their advisor is offering them wealth management services when, in actuality, the advisor is providing only investment advisory services. This is why regulators must distinguish financial advisement from investment advisement.

The convoluted conversations between industry and government regarding the difference between fiduciary and non-fiduciary conduct have obscured our view of what wealth management is, such that we fail to ask the question: “Fiduciary of what field?“ Investment management and wealth management are not synonyms. Wealth, by definition, means assets minus liabilities. But not all assets are investments. It is not even the case that all financial assets are investments. For example, DOL agrees that a term life insurance contract is not an investment. (This 2022 piece articulates my views on the difference between asset and wealth management.)

Insurance, which, from the perspective of the consumer, is the liability minimization industry, is a critical component of wealth management. Historically, fixed insurance manufacturing and distribution have been regulated by states as a domain relating to liability minimization vehicles, which it has viewed as fundamentally distinct from investment vehicles. But regulatory intentions around insurance governance are changing before our very eyes. Accordingly, it is only right that we now acknowledge and fix our regulatory frame to allow for insurance to have its rightful place in this new world where the government prefers advising (verb sales) over product (noun) sales as a wealth management distribution delivery framework.

Saving and investing need not be regulated as synonyms. Some Americans, with some of their savings, might not ever want to enter the market. If it were to become possible in the future, they might want to save directly, perhaps through an “insurance advisor,” into the insurance vehicle income stream option within BlackRock’s new LifePath strategies, or perhaps into ALEXIncome’s DC product design, or in any number of other ways to buy credits towards the eventual purchase of a fixed income annuity, which historically is not viewed as an investment.

In a comment letter I submitted to DOL on 1/2/24, I suggested that, rather than force those not entitled by the SEC to self-identify as “investment advisors” to say they “routinely sell investment advice”, it could complete the field of financial advisement by codifying one of the three fiduciary advisory roles suggested below, while getting financial planning out from under the 40 Act:

      1. Retirement Income Adviser (advisement upon income statement. Codification of this identity lends cause for” income under advisement” to become an advisory billing frame, which would be more likely to align with governmental priorities for ERISA assets than can AUM as a billing frame)
      2. Wealth Adviser (or financial adviser or financial planner not under the 40 Act) (advisement upon statement of net worth); or
      3. Insurance Advisor (advisement on right side of balance sheet).

It is unreasonable that our regulatory framework fails to facilitate a service delivery organization with oversight of qualified insurance experts who deliver insurance advisement, which would differ from insurance product sales in the same way that investment advisement differs from brokerage in financial services.

Our government has made it crystal clear that its preferred frame for financial services delivery is investment advisement,  which it does not clearly acknowledge to be a discipline different from financial advisement. Framing, as such, ignores the value proposition of an industry that is a bedrock of our country’s financial foundation. As noted by FINSECA, Americans need holistic financial advice that includes a combination of life insurance, investments and annuities, as quantitatively demonstrated here by Ernst and Young. American retirement savers deserve financial services distribution frameworks that incentivize the optimization of their wealth, not merely one that maximizes their near-term investments.  If the government desires that all recommendations made related to retirement savings are made by a fiduciary, then, in addition to investment advising, it should codify one of the fiduciary advisory identities that could contribute to lifetime wealth optimization, as described above.

Michelle Richter-Gordon is founder of strategic consultancy MRG Advisors. Ms. Richter-Gordon believes that financial advisory services are (asset – liability) maximization services, not solely asset-maximization services, and she believes strongly that the DOL, as well as SEC/FINRA, should reconsider the financial, which is not a synonym to investment, services regulatory frame accordingly.

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