A fiduciary standard creates internal conflicts for advisers

The fiduciary motivation to avoid losses tends to be greater for advisers than the risk of not growing client wealth

Jan 28, 2015 @ 11:00 am

By Bill Militello

Registered investment advisers could have more competition by the end of the year if Finra extends a fiduciary standard to its regulated brokers. The change would be significant, increasing expectations for brokers currently held only to a suitability standard.

While it's difficult to anticipate what Finra will accomplish this year from its lengthy list of regulatory priorities, the announcement should serve as a reminder that competition for clients will continue to emerge.

With brokers potentially hot on investment advisers' fiduciary tail, an adviser's ability to tout a fee-only revenue model and serve as a fiduciary to clients are points of differentiation that could be disappearing. And I say it is for the better.

A fiduciary standard, for all its good intentions, puts a veil over investment advisers' priority to conservatively manage the risk of their practice. Managing risk for clients by directing them to conventional investment tools like individual stocks, ETFs or mutual funds serves another purpose for advisers. They are able to manage the risk to their top line in addition to the stated intent of managing client risk.

(More: 3 ways advisers can zero in on the best client prospects)

Why? Because regulations and compliance concerns have cast a misperception that certain investments can blow up more frequently, and therefore investors should limit their exposure to them.

Oil, gold, emerging markets, European equities and Pimco funds have never declined? And former blue-chip companies have not stagnated and been delisted?

To that end, the conflicting internal interests for advisers running a practice with the priority of maintaining assets under management by conservatively maintaining client wealth, rather than exploring wealth-creating opportunities, will forever alienate advisers from the most coveted clients of all: wealthy self-made entrepreneurs.

(Related read: Build client trust through clear communication and transparency)

In my experience, wealthy entrepreneurial-minded individuals are more engaged with industry disruption and innovation than pie charts. They made their money in the private markets, not by dollar-cost-averaging into the stock market.

Advisers are in the business of maintaining their assets under management. A traditional 60/40 portfolio will do just that: maintain assets. While there is a real risk in letting portfolios fall stagnant, apparently the fiduciary motivation to avoid loss is greater than the risk of not growing client wealth.

Bill Militello is founder of Militello Capital, a Northern Virginia-based private equity investment manager working exclusively with registered investment advisers (RIAs) who aim to broaden their portfolio allocations to include entrepreneurs and real estate.


Do you think a fiduciary standard keeps advisers from attempting to increase clients' wealth?

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