Stockbrokers are ready to shed their sales culture, says SEI Investments study

Brooke’s Note: When change comes, it happens gradually before happening suddenly. I’m of the school that the move to a serious fiduciary standard from the more haphazard ones that populate our rulebooks is happening, regardless of what lobbyists, legislators, CEOs or other industry ostriches have to say on the matter. When I was taught regulation as an economics student, we studied the meat industry as a case study. The fiercest advocates for tough USDA standards on pork chops were the biggest, best meat companies in Chicago. Tainted meat at smaller rivals tarnished their reputation, too. The results of SEI’s new study about brokers’ attitudes about the fiduciary standard affirm that advisors are aware that financial e coli, from whomever, is toxic to everybody’s asset-gathering plans. The study’s sub-findings are particularly interesting – and affirming – for the pro-fiduciary crowd.

After about eight months of public debate about whether the fiduciary standard ought to apply to everyone who gives investment advice, a new SEI Investments study finds the tide may be turning in favor of fiduciary. A survey of 890 financial advisors, most of whom identified themselves as brokers, found that among brokers 53% favored being held to the standard, while only 27% opposed the idea that “all financial professionals who give investment and financial advice should be required to meet the fiduciary standard.”

Another 19% said they were undecided about the issue.

This finding of broker support for the fiduciary standard – and tepid opposition – is an encouraging sign, says Knut Rostad, chairman of the Committee for the Fiduciary Standard.

“We see that brokers are ahead of the industry’s lobbies in terms of going down this road and responding to the needs of the marketplace,” he says.

Rostad identified the holdouts as including the National Association of Insurance and Financial Advisors, and the Association for Advanced Life Underwriting.
“They are most candid in what they want, which is not being held to a fiduciary standard,” he says.

Unworkable

Indeed, this is what NAIFA’s president, Thomas Curry told the publication Life and Health Insurance News in October: The standard is “simply unreasonable and unworkable” from the perspective of NAIFA members.

Currey added that most NAIFA members depend on selling commission-based products for the lion’s share of their production.

“They would have difficulty acting ‘solely’ in the interest of their clients,” as proposed by the Obama administration, Currey said to the publication.

This sort of recalcitrance toward a fiduciary standard was the industry norm among brokers – not the province of commission-sales diehards — until very recently, according to Rostad, who helped to design the SEI study. SEI is an Oaks, Pa., provider of turnkey asset management programs for financial advisors.

“Brokers support tougher oversight of brokers,” he says. “This [revelation] comes in the context that until six months ago the industry was only known for staunchly opposing the standard. Against that backdrop, that’s notable.”

The SEI survey was completed by an impressively large sampling: 890 financial advisors, including 510 who identified themselves as commission/fee brokers, 132 commission brokers and 242 advisors who checked the fee-only and fee-based boxes. In other words, 642 of the 890 survey participants are brokers. SEI sells the vast majority of its turnkey asset management programs to advisors affiliated with independent broker-dealers.

The SEI study also looked at whether brokers understand what it means to accept a fiduciary standard as a code of conduct. The answer seems to be affirmative. For instance, it found that 78% of brokers say they understand that the standard requires that they disclose their compensation and all investment expenses in writing.

Loopholes

Most brokers are not looking for loopholes: 61% of them say that clients should not be allowed to waive the fiduciary standard of care, according to the study.

In addition, 37% of commission-only brokers and 55% of commission/fee brokers do not believe they should be allowed to meet a fiduciary standard in providing advice and then revert back to the suitability standard when selecting, recommending and selling investment products.

The survey results also showed some evidence brokers see that stiffer standards will yield a net economic benefit. Sixty percent of surveyed brokers understand that adhering to accepted fiduciary standards can reduce their liability in the event of poor investment performance.

The brokers [85%] understand that the standard permits them to continue to sell commission products and 91% of brokers understand that a fiduciary standard doesn’t prohibit them from selling proprietary products.

Though brokers and fee-only advisors offered similar responses on many questions, they differed sharply on one point. Only 15% of fee advisors say they believe investors don’t care about how they are compensated.

Indifferent

Commission-only [63%] and commission/fee brokers [56%] believe that investors are indifferent toward how they compensate their financial advisor.

The survey’s results may help people realize that the attitudes of brokers have fast-forwarded to ones more in line with fee-based advisors..

“As the debate continues in Washington and on Wall Street, the results of the survey offer factual evidence into what brokers and advisors think and know about the fiduciary standard, rather than simply relying on anecdotal assumptions,” the SEI study concludes.