On Recruiting

Saying you are a fiduciary does not mean you are a fiduciary

The brokerage suitability model is rife with conflicts of interest, but the RIA model is not pure

Sep 11, 2017 @ 1:48 pm

By Danny Sarch

Have you noticed the plethora of recent headlines of bad advisers cheating clients? In case you missed them, here are a few from just the last few weeks:

SEC says RIA stole $1 million from clients, using some of it to support gambling habit

RIA adviser gets two years in prison for cherry-picking trades

Court orders RIA to pay nearly $2 million for defrauding athletes

Los Angeles RIA charged with defrauding athlete and wife

What do they have in common? All of the accused advisers were RIAs; that is, they were fiduciaries. More accurately, they were pretending to be fiduciaries in order to more easily cheat their clients.

I ask that you try thinking for a moment like a criminal, who sets up a money management, financial advisory, financial planning practice with the true intent of cheating unsuspecting clients out of their money. Would you advertise yourself when you met with your prospects as operating under the "suitability standard" or would you promise that you would be a fiduciary?

While the fiduciary discussion that continues to roil the industry is useful, and the conflicts of interest that exist need to be disclosed, we should not forget that the biggest difference between the crook who cares about lining his own pockets and true professional who cares passionately about his or her clients is still the ethics of the individual practitioner and not the rules under which he or she operates.

(More: The bull market for wirehouse recruiting deals is over. What will happen next?)

I have met many RIAs over the years who are indignant when their model is compared to a brokerage model. They proudly tout the fiduciary standard, adhere to its spirit and intent and then use it as both a marketing tool and a sales tool. Yes, the brokerage suitability model is rife with conflicts of interest. But the RIA model is not pure. For example, in many firms, the chief compliance officer is a partner in the firm. While brokerage firms are rightfully criticized for sometimes protecting big producers at the expense of a client, the RIA compliance officer has the same conflict of interest.

Brokers are under the jurisdiction of the Financial Industry Regulatory Authority. Finra has its own problems, as covered extensively by InvestmentNews. While brokers are watched closely by their own firms and Finra, RIAs are under the less burdensome jurisdiction of their home states and the SEC. The most ethical and talented advisers become RIAs in order to free themselves from the brokerage model and the constant, daily scrutiny of their firms whose fear of Finra makes them unwilling or unable to differentiate the best advisers from the worst. Unfortunately, the LEAST ethical advisers also want to escape that same Finra and big firm scrutiny.

One top adviser who opened up his own RIA firm recently told me: "Working for a brokerage firm is like driving on a highway that has a cop every five miles who wants to stop you to make sure you have your seat belt on." Having left the wirehouse scrutiny and Finra's jurisdiction, he feels that he can spend most of his time servicing his clients. He proudly, and correctly, calls himself a fiduciary. At the same time, he recognizes that the unethical adviser from the brokerage firms can also take advantage of the same freedom he now has.

(More: How firms should treat top-performing advisers)

I talk with dozens of top advisers every month and every single one tells me that they act in their clients' best interest, regardless of the suitability or fiduciary standards. When asked, every one of them will also bemoan that "fear of being ripped off" is an obstacle to getting clients to seek professional investing advice. Most absolutely support a uniform fiduciary standard with transparency around costs, while allowing clients to choose how best to pay for these services.

Theft is illegal, yet locks and alarm systems are still wise choices to protect a home. No amount of regulation will ever be able to inoculate clients from the disease of a criminal adviser. The wealth management industry, instead of arguing over who is more ethical and pretending that having a fiduciary standard is enough in and of itself to protect a client, should be spending more time educating clients on how to detect fraud, on how to put alarms and locks around their money. At the end of the day, education and caveat emptor are the best protections.

Danny Sarch is the founder and owner of Leitner Sarch Consultants, a wealth management recruiting firm based in White Plains, N.Y.


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