Sheryl Garrett scoffs at argument against fiduciary duty

Founder of Garrett Planning Network says investors with low net worth can be served in a market where all advisers must act in their best interests

By Mark Schoeff Jr.

May 6, 2014 @ 12:21 pm (Updated 12:11 pm) EST

Sheryl Garrett
Sheryl Garrett

One investment adviser is sick and tired of the financial industry's threat that mom-and-pop investors will suffer if investment-advice standards are raised.

Sheryl Garrett, founder of the Garrett Planning Network Inc., said that investors with low net worth can be served in a market where all financial advisers must act in their best interests.

She dismissed the argument that under a uniform fiduciary duty, middle-income Americans would be priced out of the advice market because brokers would abandon commissions and charge fees based on assets, as most investment advisers do.

She points to her own network of more than 300 advisers who work on an hourly fee.

“We're actually starting to see that movement grow,” Ms. Garrett said during a media briefing in Washington on Tuesday hosted by the Consumer Federation of America, AARP, the AFL-CIO and Americans for Financial Reform. “Can't this middle market be served? Yes, it absolutely can and it should be for the sake of our entire society under a fiduciary standard.”

She highlighted firms such as Betterment, WealthFront and LearnVest that are introducing new investment-advice models that target lower-asset investors.

“We're seeing the marketplace step up and meet the demand,” Ms. Garrett said via teleconference. “If the old-school delivery channels don't work under the fiduciary standard, they need to evolve.”

Both the Labor Department and the Securities and Exchange Commission are considering rules that would require brokers to act in the best interest of their clients, a fiduciary-duty level of service that currently governs investment advisers. Brokers are held to a suitability standard that allows them to sell high-priced investment products as long as they meet their clients' needs.

The DOL is expected to propose a rule later this year that would expand the definition of “fiduciary” for retirement-plan advisers. The SEC is grappling with a decision on whether to propose a regulation that would impose a uniform fiduciary standard for retail investment advice.

Brokers would support a best-interest standard, according to Kent Mason, a partner at Davis & Harman, a consulting firm that represents many banks, brokerages and other financial institutions. What they're wary of is what he calls the DOL's targeting of mutual fund revenue sharing.

“The brokerage model will be illegal under everything the department has been talking about,” Mr. Mason said. “The fact of the matter is that most of broker compensation comes from payments from the mutual funds. The department has made clear that most of that is not going to be permitted.”

The United Kingdom has put in place a law similar to the pending DOL rule, and it has had a deleterious effect on investment advice for middle-income investors, according to Mr. Mason.

“There has been a massive withdrawal of advice from small accounts attributable to a rule that would have the exact same effect as what the department has been discussing,” he said. “We do not want to go down that path of hurting the small and midsize investor here.”

A study released by Davis & Harman in November found that several of Britain's big banks have raised minimum account limits for investment advice. For example, HSBC provides advice only for customers with at least $80,000 in total assets or $160,000 of annual income. Lloyds has set an asset minimum of $160,000, while Barclays has set its minimum at $800,000.

Other financial companies no longer offer in-person investment advice.

Officials from the organizations hosting Tuesday's media briefing warned that the sale of more expensive investment products under the suitability standard is chipping away at the retirement savings of many Americans.

“That half a percent or more over the long-term for a retirement-type of investment is tens of thousands of dollars that middle-income investors cannot afford to do without,” Barbara Roper, director of investor protection at the Consumer Federation of America, said at the meeting.

Ms. Garrett also shot down another argument that industry makes — namely, that investors would have a limited array of financial products to choose from if the commission model erodes.

“They will not be able to purchase the mediocre and really crappy investments,” Ms. Garrett said. “They're not going to be allowed to be peddled – only the good stuff.”

She was particularly critical of annuities. She cited a court case in which she was an expert witness in which the financial adviser inappropriately put clients in variable annuities.

“If she had VA salesperson tattooed on her forehead, which is one of my recommendations,” the investors would have been better protected, Ms. Garrett said.

Lee Covington, senior vice president and general counsel at the Insured Retirement Institute, countered that nine in 10 annuity investors are satisfied with their purchase of the products, according to an IRI study of 475 investors in 2012. A study by BlackRock last year showed that 89% of retirement plan participants wanted annuities in the plan. Annuities contain a total of about $2 trillion in assets.

“We'll put that record up against any investment,” Mr. Covington said. “All these people can't be wrong. Annuities, for the right people, are a critical part of their retirement strategy.”

The IRI is working with the National Association of Insurance Commissioners on a model rule for annuity sales.

“We are a strong, unyielding proponent of suitable sales,” Mr. Covington said. “We want to put the client's interest first.”