Disclosures Are Not Sufficient To Fulfill The Fiduciary Duty

Investment News’ Fiduciary Corner had an excellent article by Blaine F. Aikin, executive chairman of fi360, entitled “Can investment advisers disclose away all conflicts?” The entire article is worthy of careful reading as Aikin outlines one of the central challenges to the Securities and Exchange Commission’s failed experiment of relying on disclosures and informed consent to protect consumers in the United States. As Aikin writes:
Disclosures are always necessary but rarely sufficient to fulfill fiduciary obligations. …As important new guidance, the SEC notes that some complex or extensive conflicts may defy adequate disclosure, thereby depriving clients of the ability to provide truly informed consent. The SEC goes on to assert: “In all of these cases where full and fair disclosure and informed consent is insufficient, we expect an adviser to eliminate the conflict or adequately mitigate the conflict so that it can be more readily disclosed.”
I have written previously about the myriad of hidden fees at commission-based firms. The list of ways that Ameriprise makes money is so extensive and complex that I believe explaining the impact of every conflict created by their business model defies adequate disclosure.

How do you explain the impact of the fact that Ameriprise promotes and prioritizes fund companies that  pay-to-play on their platform even though these are not the best funds? How should clients assess the fact that “Periodic expenses are paid from product assets, such as Rule 12b-1 fees paid from mutual fund assets …and distribution fees paid from Ameriprise Certificate assets?” Why does Ameriprise receive a portion of any margin interest charged by AEIS? Why does the criteria of mutual fund selection at Ameriprise include “Marketing payments to support the cost of distribution” but not include low cost of fund fees? How does the fact that “Ameriprise Financial Services receives up to 0.62% of money fund deposits for its money market fund sweep program” impact its recommended cash allocations?

Studies have found that financial disclosures confuse investors and often make them conclude the exact opposite of what they should. Aikin explains in his article, “the SEC declares that the adviser/client relationship ‘in all cases remains that of a fiduciary to a client … the investment adviser cannot disclose or negotiate away, and the investor cannot waive, the federal fiduciary duty.'” In other words, neither disclosures nor client consent is sufficient for the advisor to avoid his fiduciary duty. Advisors have an obligation to eliminate as many conflicts as possible in order to fulfill their fiduciary duty. Those conflicts that they cannot eliminate, they are required to clearly expose in such a way that their clients understand the conflict well enough to make an informed decision. Even commission-based advisors have an inability to fully understand the systemic impact of the commission-based environment within which they work. Even if one individual advisor at a commission-based firm is trying hard to fulfill their fiduciary duty, the decisions already made by those with more authority at the firm have already created hidden conflicts of interest that may hurt the client. The rules for broker-dealers posing as advisors are even worse than those for commission-based advisors. Broker-dealers argue to the government that they don’t provide advice but then pose as advisors to consumers. Alas, the SEC has left this group, representing 61% of registered representatives, exempt from its adviser rules. The latest SEC rules simply abandoned the fiduciary standard for this group entirely, and the SEC has not been enforcing the law since 1940, even though the FPA and NAPFA continue to challenge the SEC on their unequal standards and failure to uphold the law. The confusion and manipulation of the dark side of financial planning is the main reason we recommend skipping them entirely. Instead, you should look into the fee-only financial planning promoted by the National Association of Personal Financial Advisors (NAPFA). Fee-only financial planner’s are compensated in a straightforward manner directly from the client. You deserve a fee-only fiduciary no matter how much money you have to invest. Photo by Andrew Neel on Unsplash

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David John Marotta

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