Fiduciary Rule/Brokerage and Insurance Industry Deceptions Blasted – Report: 25 Major Financial Firms Misleading Consumers

Executive Summary

When is a “financial advisor” really an advisor and when is she just a salesperson? The answer to that question has important implications for millions of Americans who turn to financial professionals to help them navigate often complex decisions regarding how best to invest for long-term goals, including retirement. After all, people expect salespeople to look out for their own interests and maximize profits, but advisors are expected to meet a higher standard. They are expected to put their clients’ interests first, a requirement that is known as a fiduciary duty.

It turns out, however, that how certain “financial advisors”1 answer that question varies greatly depending on the context. These are the transaction-based financial professionals typically employed by broker-dealers and insurance companies. When they are marketing their services to the investing public and enticing clients into handing over their hard-earned savings, these sales-based financial professionals present themselves as “trusted advisors” whose only concern is their clients’ best interest. But try to hold them legally accountable for meeting that standard, and those same “advisors” quickly change their tune. Because they are salespeople who are “merely selling” investment products, they claim, no fiduciary standard ought to apply.

Financial Advisor

Investors who unknowingly rely on biased salespeople as if they were trusted advisors can suffer real financial harm as a result. It is estimated, for example, that retirement savers lose $17 billion a year or more as the result of the excess costs associated just with conflicted retirement advice.2 The cost on an individual basis, in the form of lost retirement savings, can amount to tens or even hundreds of thousands of dollars over a lifetime of investing, money that retirees struggling to make ends meet can ill afford to do without. In addition to paying higher costs, investors who rely on biased sales recommendations as if it were unbiased advice can end up facing unnecessary risks or receiving substandard returns as a result of incentives that pervade the compensation system for sales-based advisors. Cumulatively, these industry practices drain tens of billions of dollars every year out of retirement savers’ pockets and into the pockets of financial institutions and their financial professionals.

The dichotomy between financial firms’ marketing claims and their legal arguments was previously described in research from the Public Investors Arbitration Bar Association (PIABA). That study contrasted the way major brokerage firms describe themselves in advertising campaigns with the arguments they mount when defending against customer claims in arbitration.3 Based on its analysis, PIABA concluded that a fiduciary standard should be adopted to protect investors from the harmful impact of conflicted advice.

Since the PIABA study was released, the Department of Labor (DOL) has finalized a rule that requires all financial professionals to act as fiduciaries when providing investment advice to retirement savers. At the center of the rule is an obligation to offer recommendations in the best interests of the customer, without regard to their own financial interests. Having fought to prevent the rule from being adopted, the major broker-dealer and insurance trade associations have challenged the DOL rule in court, arguing in part that the DOL exceeded its authority by applying a fiduciary standard to conduct that was not advisory in nature.

Building on the earlier PIABA study, we sought to test this legal argument against the actual practices of the trade associations’ member firms. To do so, this white paper compares how major broker-dealer and insurance firms present themselves and their services on their websites and how they describe those same services in their legal challenge to the DOL rule. Based on a detailed review of company websites for 25 brokerage and insurance firms – all of which are members of the trade associations that have challenged the DOL rule – we found that these firms have adopted all the hallmarks of fiduciary advisors:

  • They routinely refer to their financial professionals not as sales representatives or agents but as “financial advisors” and indicate that they have a level of expertise that can and should be relied upon by their less sophisticated clients. In our in-depth review of company websites, we did not find one firm that referred to its financial professionals as salespeople.
  • They typically describe their services as providing investment “advice” and retirement “planning,” not simply product sales. Our review of company websites did not identify any prominent description of their services as arm’s length investment sales recommendations.
  • And they market those services with messages whose clear intent is to convince retirement savers that they should trust that their advisor will be looking out for their best interests. In so doing, firms encourage reliance on their expertise and recommendations.

In short, in their eagerness to attract clients and increase sales, these brokers and insurers do everything they can to create the reasonable belief and expectation on the part of investors that they are providing fiduciary investment advice rather than non-fiduciary investment sales.

This stands in sharp contrast to how financial trade associations have presented their business practices in legal filings challenging the DOL rule. In such filings, the U.S. Chamber of Commerce and several of its Texas affiliates, the Securities Industry and Financial Markets Association (SIFMA), the Financial Services Institute (FSI), the Financial Services Roundtable (FSR), the Insured Retirement Institute (IRI), the American Council of Life Insurers (ACLI), and the National Association of Insurance and Financial Advisors (NAIFA) have claimed, for example, that broker-dealer reps and insurance agents are not true advisors because they do not actually provide unbiased advice and are not engaged in relationships of trust and confidence with their clients. Instead, they claimed that broker-dealer reps are just “salespeople” engaging in activity “whose essence is sales” that is no different from other commercial sales relationships in which “both parties understand that they are acting at arms’ length.” They therefore claim that it is more appropriate that they be held to a sales-based “suitability” standard rather than an advice-based fiduciary standard.

The difference in the two standards – the best interest standard firms strongly suggest that they meet when marketing their services and the suitability standard they argue should apply – is significant. The suitability standard that governs securities and insurance recommendations allows “financial advisors” to recommend investments that are more profitable for them, rather than those that are the best option for their customers, as long as those recommendations are generally suitable for the investor. In short, they can legally recommend the worst of the many possible suitable investments, rather than the one that is best for the customer. Moreover, as noted above, firms often pay higher compensation or offer other incentives to encourage their sales reps to recommend investments that are most beneficial for the firm.

Investors want and need advice that promotes their best interests, as multiple public opinion surveys have clearly shown. The DOL rule requires financial firms to conduct themselves like the advisors they have long claimed to be. When it goes into effect, investors will finally be legally entitled to receive the best interest advice they have been led by industry’s marketing practices to expect. And the billions they currently lose to conflicted advice will remain in the pockets of working families and

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