Fiduciary-duty bad news for less affluent clients: NAIFA

Rising compliance costs could force many reps to dump middle-market clients or raise fees, group says; liability the issue

Dec 17, 2010 @ 3:17 pm

By Mark Schoeff Jr.

Lower-earning investors' access to investment advice could be curtailed if federal regulators extend fiduciary duty to broker-dealers, according to a major B-D industry organization.

The National Association of Insurance and Financial Advisors released a survey today showing that the so-called “middle market” — those earning less than $100,000 annually — would suffer because of the fiduciary requirement's heightened legal liability. That added exposure, NAIFA found, would drive up compliance costs and in turn lead registered representatives to pursue more-lucrative clients.

According to the poll of NAIFA members, if compliance costs went up 15%, then 65% of the respondents would be forced to limit their practice to affluent clients, not offer securities or simply increase their fees.

The survey, which was conducted by LIMRA, also shows that 58% of NAIFA members' clients have household income of $99,000 or less.

A related survey of 1,008 consumers showed that more than half of people with income between $50,000 and $99,000 who use a financial adviser have less than $50,000 invested. Only 17% said that they could invest more than $250 per month.

Investment advice for people in the middle-market category would diminish under a universal fiduciary duty, as broker-dealers, who charge commissions on transactions, would be forced to seek more fee-based clients, said Terry Headley, NAIFA's president. Such clients typically generate larger profits for reps, which would help advisers cover rising registration and compliance costs.

“It means that our selling point and entry into the marketplace is going to have to move to higher levels,” Mr. Headley said. “Our members service a vastly underserved middle-income market. We're concerned about this kind of race to the top [for affluent clients].”

Mr. Headley was in Washington on Friday to meet with officials at the Securities and Exchange Commission. The SEC is conducting a study of the differences in regulations governing investment advisers, who must meet a fiduciary standard of care, and broker dealers, who are held to a less stringent suitability rule.

Advocates of a fiduciary standard say it provides stronger protection than suitability, which merely requires that financial products meet the needs, timelines and risk appetites of clients.

The SEC report, due to Congress on Jan. 21, is mandated by the Dodd-Frank financial reform law, which also gives the agency the option of promulgating a rule that imposes a universal standard of care for retail investment advice.

As it puts together the report, Mr. Headley said, the SEC is listening to NAIFA, which comprises 200,000 agents and their associates, whose practices center on insurance, annuities, investments and financial advice.

The agency also is hearing from fiduciary proponents, however, many of whom question the argument that the standard poses a threat to the way that broker dealers do business.

“The claims that fiduciary duty will bankrupt anybody, that it's an unworkable model, are hyperbole,” said David Tittsworth, executive director of the Investment Adviser Association. He noted that his organization includes investment advisory firms of all sizes and client profiles.

“They're living and thriving under a fiduciary duty,” Mr. Tittsworth said.

Mr. Headley's firm, Headley Financial Group, offers both investment adviser and broker-dealer services. He said that the scope of its operations helps it pay compliance bills.

“The way that works in our practice is, we just absorb those costs,” Mr. Headley said. “They're spread over the insurance business we do. It's also spread over our registered-representative activities and our investment adviser activities.”

Other NAIFA members might not have the same wherewithal to address fiduciary-duty costs, which Mr. Headley said would be layered on top of the costs of meeting the suitability standard. The NAIFA survey showed that its members who sell securities spend 525 hours and almost $9,000 annually on compliance.

NAIFA officials stress that their leeriness about fiduciary duty is related to its legal liability. They said that NAIFA members already follow the fiduciary philosophy — acting in the best interests of their customers.

“It's not going to change how they interact with their clients,” said Jill Hoffman, NAIFA's assistant vice president for federal government relations. “It's not the concept of [fiduciary duty]; it's what legal implications flow with it.”


What do you think?

View comments

Recommended for you

Sponsored financial news

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


When can advisers expect an SEC fiduciary rule proposal and other regs this year?

Managing editor Christina Nelson and senior reporter Mark Schoeff Jr. discuss regulations of consequence to financial advisers in 2018, and their likely timing.

Recommended Video

Path to growth

Latest news & opinion

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.

State measures to prevent elder financial abuse gaining steam

A growing number of states are looking to pass rules preventing exploitation of seniors.

Morgan Stanley's wealth management fees climb to all-time high

Improvement reflect firm's shift of more clients into fee-based accounts priced on asset levels, which boosts results as markets rise.

Legislation would make it harder for investors to sue mutual funds over high fees

A plaintiff would have to state in their initial complaint why fiduciary duty was breached, and then prove the violation with 'clear and convincing evidence.'

Relying on trainees, Merrill Lynch boosts adviser headcount in 2017

Questions remain about long-term effectiveness of wirehouse's move away from recruiting experienced brokers.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print