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Monday, February 22, 2010

Broker ? Advisor ? Fiduciary ?

 In my last  post I wrote about the "controversy" over extending the fiduciary stndard to insurance salesmen and stockbrokers. This nyt article shows th confusion in action.My bolds my comments in blue

Broker? Adviser? And What’s the Difference?

THE Great Recession has intensified a long-running debate: who is better able to look out for your money, a broker or an independent adviser?
Now that the shock of last year’s losses has worn off, many investors are reconsidering what their financial professionals did — or failed to do — for them. At the same time, many brokers are trying to refocus themselves as advisers. Fed by the discontented, the debate has taken on a new urgency.
At the center of the discussion are business practices and regulatory guidelines that are rarely understood by the client and often blurred in practice. Brokers are governed by the “suitability rule,” which requires them to have “reasonable grounds for believing that the recommendation is suitable,” according to the Financial Industry Regulatory Authority. Registered financial advisers are supposed to adhere to a higher standard — “fiduciary responsibility,” an ethical and legal requirement that the investor’s best interest comes first, not the adviser’s own financial gain.
The conventional view of the two camps goes like this: the brokers at the big firms have access to every product imaginable, but may be pressured to sell you one of them and earn more if they do. They are not obligated to get you the best price for what they advise you to buy or sell — or even to be free of conflicts.
The independent investment advisers proudly promote their independence and lack of conflicts. If their clients feel that the fiduciary responsibility was not met, they have legal recourse through the state courts. Brokers counter that the advisers lack the infrastructure and support of a big firm that would protect clients in the event of irregularities in their accounts or with their advisers.
In practice, though, the two standards seem to confuse investors. Congress is now considering a provision that could alleviate some of this confusion by requiring brokers to act in their clients’ best interest. “I don’t know if more than 10 to 20 percent of my clients understand the difference,” said Susan Fulton, president of FBB Capital Partners, a fee-only adviser outside Washington. “The investment advisory and brokerage businesses don’t make it clear.”....

Most registered investment advisers started at brokerage firms, and many left, they say, because they grew tired of the conflicts of interest. This trend is accelerating, says Schwab Adviser Services, which acts as a custodian for $590 billion in assets managed by 6,000 advisers. It said 2009 was its best year for signing up new advisers, with 172 new teams and $13 billion in assets.

The big brokerage firms, meanwhile, scoff. “I’ve read that advisers are leaving here at record levels, but in the fourth quarter we had historically low attrition levels among our financial advisers,” said Sallie L. Krawcheck, president of Bank of America Global Wealth and Investment Management. She reeled off the advantages to being with a big firm, like continuing education for brokers and products and loans offered by other parts of the firm. 

Well....the largest number of independent advisors work with one or more of three firms Charles Schwab,Fidelity and TD Ameritrade, I can't think of any financial products on couldnt find through them. As for continuing education, my inbox is full of offers of continuing education materials and presentations from the etf providers, mutual funds and others. And I am not obligated to attend any of these that I perceive as more "sales pitch" than "continuing education". Nor I am obligated to attend any "continuing education" that is designed to improve my sales skills rather than my knowledge of the investment world.

“The business has gone through brokerage to investment management to wealth management,” she said. “Now clients want us to take it more broadly than that.”
What may matter more than the array of services is the mind-set of the adviser. When a broker tells a client to buy or sell something, the suitability rule does not mean the broker has to be free of conflicts of interest. After all, the broker’s salary is ultimately paid by the brokerage firm, which has various products to sell. But brokerage firms say they are trying to eradicate that appearance of conflict.....

 others still hold to the traditional distinctions. “There are people who are very successful brokers who do a great job every day,” said Kemp Stickney, chief fiduciary officer at Wilmington Trust, a century-old fee-based trust company. “But if you think about it from an investment point of view, the way a lot of brokerages work is they sell you a bond out of their inventory. Because we’re not an investment banking firm, we have to ask for bids from four, five, six different firms before we buy a bond for our clients.” (Ms. Krawcheck says the array of products that Bank of America keeps in inventory is a benefit to clients.)
Advisers like Mark Matson, chief executive of Matson Money, said brokerage firms should get out of the advisory business altogether. “The problem is they hold themselves out as offering advice and value-added services,” he said. “They should just tell clients, ‘I work for a brokerage and I’m going to suggest some things, and you have to make the decision if they’re right for you.’ ”
This is where the fiduciary standard gets invoked. Rooted in trust law, that standard means that an adviser has to act impartially and solely for the benefit of the client, avoiding conflicts of interest and self-dealing.
“It’s never about us; it’s about our clients and their interests,” said R. Hugh Magill, chief fiduciary officer at Northern Trust. “They entrust their assets to us for management. But the more subtle distinction is they entrust their family to our care.”..

Of course, some investors do not have enough money to attract the interest of a top adviser. It should not come as a surprise that the level of personalized service gets ratcheted up with wealth level. Mr. Rubin’s clients have a minimum of $5 million with him, while Mr. Campbell’s clients have $1.5 million to $2 million. Most registered investment advisers require a minimum investment of $1 million, though some will accept clients with $500,000.
“If you have less than $250,000, you’re not going to get that first-class level of service,” Mr. Oechsli said. “You’ll probably get a review once a year, quarterly contact. There’s nothing wrong with that.”
That means the one looking out for your interests may have to be you.

I generally hold to a cutoff around that $250,000 for investment management services on a full time % of assets under management basis. But that is largely based on the value proposition for the client. Under that amount a fair amount of what I do with asset management isnt very effective. Allocating a $100,000 portfolio across 10 or more etfs and closely managing for rebalancing and tax loss harvesting probably doesnt generate meaningful value added vs a more simplified approach. For that reason I usually do a an asset allocation and consultation for a smaller client for a flat or hourly fee and sent the client off to implement it on their own at a discount broker. This is even more appropriate if a large part of the assets is in a 401k plan with more limited investment choices. I recommend the clients of this service come back for an annual review or there are any major changes in their circumstances. I think this a fair balance for people who dont need a more expensive full time advisor but dont want to be left on their own (or at the mercy of someone looking to generate commissions).

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