To be a fiduciary, or not to be a fiduciary?

The fiduciary rule is once again under a spotlight after a survey found broad agreement among fee-only, hybrid advisors and broker-dealer registered representatives, who all said the DOL Retirement Security Rule is needed.

When asked whether they agree that “a fiduciary standard for insurance brokers providing retirement investment recommendations is needed,” the average response was an eight, indicating high agreement amongst the three advisor segments.

Fee-only advisors had the strongest level of agreement at 8.7, while hybrid RIAs and broker-dealer representatives rated their agreement slightly lower at 6.8.

David Lau, founder and CEO of DPL Financial Partners, who conducted the survey among the 230+ industry advisors, says he was surprised by one finding: broker-dealers who think there should be a fiduciary standard.

“I think it’s just a signal of the times,” he says. “It used to be brokers wouldn't think about that. 15 years ago, it was perfectly fine to be a commission-driven, salesperson and fiduciary was an odd concept.”

“Today, it's just not the case anymore,” he added. “Even if you're working on commissions today, you really have to operate in a fiduciary manner the clients expect. More and more clients are walking through the door asking if you're a fiduciary because they know what a fiduciary is.”

There’s two key differences between fee-only and commission-based models. The first is mainly centered around who pays the advisor. In the fee-only model, the client pays the advisor directly for their advice. In the commission-based model, the advisor is paid by the insurance product company for selling their products.

Secondly, the fee-only model is seen as reducing conflicts of interest, as the advisor is working solely for the client's best interest. The commission-based model can create conflicts of interest, as the advisor may be incentivized to sell products that earn them higher commissions.

Nevertheless, despite strong agreement with the need for the rule, other industry leaders assert it doesn’t do the industry any good.

Marc Cadin, CEO of Finesca, an organization that represents more than 10,000 financial security professionals who provide life insurance and retirement planning solutions, says the notion of being in a fee-only or commission-only world “is just plain stupid.”

"It's not surprising that fee-only advisors prefer their business model," he acknowledges. "But the real question is what will deliver the best results for the American people."

He argues that fee-only advisors, by definition, are not holistic financial planners. "In order to work with a fee-only advisor, you've got to have a minimum amount of investable assets."

In contrast, Cadin advocates for financial plans that incorporate permanent life insurance, savings through investments, and annuities, a strategy he says has been proven to deliver better outcomes for consumers, pointing to independent research from Ernst & Young in 2022.

“We don't have too many Americans that have effective financial plans that are saving more than they're spending, that have all of their protection needs fulfilled, or that are overly prepared for retirement,” he says, highlighting that the number one source of retirement income for Americans is Social Security, “which pays out $3.4 billion every day.”

The second largest source of daily payments to Americans, according to Cadin, is the life insurance industry, where they pay out approximately $2.6 billion every day “through various payments.”

He asserts the fee-only model is "fundamentally flawed" if the goal is to provide comprehensive financial advice.

“There should be no fee-only advisors,” he added. “They should actually provide holistic financial plans that include permanent life insurance, and we should focus less on the compensation derived by the advisor and more [on] the value that they are providing consumers.”

Cadin's perspective extends beyond the fee-only versus commission debate. He sees a future where the industry focuses less on compensation models and more on the value delivered to consumers.

While he admits there's nothing wrong with either compensation model, he says the problem lies “when you get into the word ‘only’, and if you're picking a model that's fee [or commission] only.”

"Charging a fee, perfectly fine. Receiving a commission, perfectly fine. But this notion that financial firms are going to live as fee-only or commission-only, it's just not going to be sustainable,” Cadin says.

As the DOL's fiduciary rule remains in legal limbo, Cadin is optimistic about the industry's evolution.

"We're already seeing it in the marketplace," he says. "More and more financial firms are converging towards a holistic approach, because consumers are demanding it."

Ultimately, no matter the compensation model, Lau believes advisors are leaning into fiduciary and fee-only “very strongly.”

“The rule is just a proxy for the general feeling of how you operate your practice,” he says. “It’s interesting to see advisors who will accept commissions are still thinking fiduciary.”