Veralytic Logo

A New Survey Finds that Financial Advisors may not be as Fiduciary as They Think

Friday, September 14, 2012

A new survey of 500 registered investment advisors, investment advisory representatives and registered representatives aren’t as fiduciary as they think they are. This study from Financial Advisor magazine, 3ethos and Boston Research Group surveyed advisors on fiduciary best practices, client’s best interests, and legal and procedures of fiduciary services.

An article in Financial Advisor magazine states, …the answers were tabulated on a fiduciary best practices index, and were assigned scores and accompanying letter grades ranging from “A” to “F.” The average, industry wide index score among all respondents was 76, or a “C” letter grade. The mean score was 78, or a “C+” grade. “There’s a disconnect between principles and practices,” says Don Trone of 3ethos, noting the survey reveals that a number of advisors believe they’re acting in principle to a fiduciary standard but in reality don’t understand the practices.

Currently brokers are held only to a rules-based suitability standard. The fiduciary standard of care is widely viewed as more stringent than the suitability standard. “The suitability standard focuses on sales conduct. It requires the representative to sell the most appropriate product for the client [from among those products that the representative is licensed to sell and without disclosing any sales limitations]. The fiduciary standard requires the representative to act solely in the interest of the client without regard to the financial or other interest of the broker, dealer, or advisor providing the advice.”[i] Under a fiduciary standard, the advisor would have to recommend the product that is best for the client, without regard for the incentives and would have to tell the client of any conflict of interest that arises.

Brokers who hold themselves out as life insurance experts (versus simply a salesperson for some limited number of insurers) and who make product recommendations (which clients generally believe to be in their best interest without disclosure to the contrary) are already being perceived and treated as common-law fiduciaries. As such, even if the SEC does not impose such a fiduciary standard-of-care on brokers in the near term, the days of brokers representing the products from some limited number of insurers while implying they are representing the best interest of the client are likely numbered.

Some are concerned it is impossible to prove which product is “best” for a client. However, a fiduciary standard does NOT require that a recommended product be the “best” product. Instead, it prescribes a “prudent process” which, if followed, can protect fiduciaries against future claims that some product was not the “best” for a given client in a given situation. In other words, fiduciaries who follow a “prudent process” can actually be wrong about product selection and not be liable for recommending a product that may not have been the “best” in hindsight.

For instance, in an adjudicated case of breach of fiduciary duty involving life insurance, beneficiaries lost between $3.25 MILLION to $5.46 MILLION yet the court concluded the fiduciary was NOT liable for such losses. How is it possible for beneficiaries to lose MILLIONS while the fiduciary was found to have been serving the client’s best interests? Because the fiduciary was able to prove they followed a “prudent process” and did so using information from an "outside, independent entity with no policy to sell or any other financial stake in the outcome."

But if “client’s best interest” has a different meaning, then how do you know which brokers really mean it? And if you are a broker, then how do you prove to clients and advisors that you really DO mean it? Agents/brokers who are or may be perceived by clients as life insurance experts who are serving the best interests of the client would be well served to provide independent research that supports such recommendations. Similarly, independent advisors who owe a fiduciary duty to the client would also be well served to suggest/insist that product recommendations/proposals include independent research as to the suitability of the recommended product to the client’s situation relative to peer group product alternatives.

Veralytic is simply the fastest, easiest, and most comprehensive and cost-effective way to independently verify to clients and their advisors whether or not the pricing and performance of existing or proposed life insurance is in their best interest. Only Veralytic is accepted for independent client representation, endorsed by the New York Bankers Association (NYBA) and compliant with industry regulations and established case law.

Use the Veralytic Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for your (client’s) policies based on the 5 factors of suitability. Click here and get up to 3 Veralytic research reports under our NO-Risk trial subscription.

[i] National Underwriter, “Are You a Fiduciary” Linda Koco. Oct. 5, 2009


Comments are closed on this post.