Introduction to The Fiduciary vs. Suitability Chart
The life insurance industry is spending billions of dollars through a fierce political lobby to protect its sales force from being held to the highest standard of professional accountability: the fiduciary standard. An obvious question is, why? It’s a more involved question with more complex answers than I will explore in this post.
The chief and most disturbing problem I observe is that consumers are confused, muddled about the importance of the issue. But no, it’s even worse: most consumers don’t even know there is an issue at all!
And so, with a mind to both sounding the alarm and perhaps dispelling some of the confusion in this area, I offer the following Fiduciary vs. Suitability comparison in an expandable table format. This is not an exhaustive comparison, but a candid one, one that I hope consumers will be able to read and appreciate.
(Mobile phone user: because you are viewing the Fiduciary vs. Suitability comparison on a small screen, the side by side aspect of this table has been sacrificed in order to make the content more readable in your device’s browser.)
Fiduciary vs. Suitability:
A Standard of Care Comparison Table
Arbitration statistics from the Financial Industry Regulatory Authority show that in 2008 there were 2,838 cases served that involved breach of fiduciary duty, vs. 1,181 for unsuitability. David Serchuk, Forbes Magazine. Suitability: Where Brokers Fail.
While some might conclude from the statistic above that fiduciary relationships are more likely to end in conflict; it is far more appropriate to conclude that breaches of fiduciary duty are easier to establish and prove in court. Therefore, many more of these disputes – almost three times as many – are litigated.
Consider that there are an estimated 643,000 individuals operating as registered brokers under the suitability standard vs a mere 12,000 operating as investment advisors under a fiduciary standard.
Now, I’m no statistician; so I’m not sure it’s entirely reasonable to use the above to arrive at predictive ratios. But, if it were . . . it would suggest that if all of the brokers operating under the suitability standard in 2008 were to be held to a fiduciary standard, that faction of professionals would have received 154,320 cases served in 2008 vs. the 1,181 it actually received. (Yikes!)
It should be no wonder that the life insurance industry is eager to avoid being held to this standard of care. Its legal costs will skyrocket.
If an underwhelming house brand . . . lines up with the vague outlines of what is considered suitable [the adviser] can still push it, even if it costs more to own, or underperforms peer [products].David Serchuk, Forbes Magazine. Suitability: Where Brokers Fail. Forbes Magazine, 6/24/2009.
“Brokerage customers are, in a certain sense, deceived. If brokers continue to call themselves advisers and advertise advisory services, customers believe they are receiving objective advice that is in their best interest. In many cases, however, they are not.”Professor Arthur Laby, former assistant general counsel at the Securities and Exchange Commission
Furthermore, because the competitive costs of a product (both internally and externally) are not factors that carry any weight in determining whether a product is suitable, establishing noteworthy damages (read: financial losses worth splitting with the attorney who helps recover them) is a significant challenge.
Is it any wonder that relatively few breaches of the suitability standard are pursued in the courts?
A Definition That Cuts Through The Clutter
[Being a fiduciary] means that you have a fundamental obligation to act in the best interests of your clients and to provide . . . advice in your clients’ best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client, and you should take steps reasonably necessary to fulfill your obligations. You must employ reasonable care to avoid misleading clients and you must provide full and fair disclosure of all material facts to your clients and prospective clients. Generally, facts are “material” if a reasonable [buyer] would consider them to be important. You must eliminate, or at least disclose, all conflicts of interest that might incline you — consciously or unconsciously — to render advice that is not disinterested. If you do not avoid a conflict of interest that could impact the impartiality of your advice, you must make full and frank disclosure of the conflict. You cannot use your clients’ assets for your own benefit or the benefit of other clients, at least without client consent. Departure from this fiduciary standard may constitute “fraud” upon your clients.The Staff of the SEC's Office of Compliance Inspections and Examinations
(Author’s addendum: subsequent to writing this post, I discovered to my dismay that most life insurance transactions are not even subject to the suitability standard. This would further explain the industry’s battle against the fiduciary standard.)
Articles/References Cited or Used
- An Investment Adviser’s Fiduciary Duty. Lorna A. Schnase, Attorney at Law. August 1, 2010.
- “Fiduciary Standard of Care: Rekindling The Debate”. Professor Joseph M. Belth, JosephMBelth.com. October 17, 2014.
- Information for Newly Registered Investment Advisers. The Staff of the Security and Exchange Commission’s (SEC) Office of Compliance Inspections & Examination. No date of publication provided on website.
- “Suitability: Where Brokers Fail”. David Serchuk. Forbes Magazine. June 24, 2009.
- “The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice”. Michael Finke, Ph.D., CFP®, and Thomas P. Langdon, J.D., LL.M., CFP®, CFA. Journal of Financial Planning. No date of publication provided on website.
- Finra Newsroom Statistics Infographic. https://www.finra.org/newsroom/statistics
- “Brokerage firms debate value of Certified Planner title.” Jed Horowitz. Reuters. June 3, 2013.
- “How many RIAs are there? No, seriously, how many?” Kelly O’Mara. RIABiz. November 11, 2015.
© Michael C. Burton, 2016 and all years.