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SEC Delays, Citing Customer Confusion

Thursday, February 09, 2012

According to Bloomberg, The U.S. Securities and Exchange Commission’s (SEC) efforts to impose a fiduciary standard are delayed until the agency can do a better job of studying the cost-benefit analysis. The SEC released a study a year ago recommending the [fiduciary standard] change, citing customer confusion over the difference between a broker and an investment adviser.

While the SEC is still studying this, the #1 complaint continues to be a breach of fiduciary duty, according to the Financial Industry Regulation Authority Dispute Resolution Statistics. At least part of the reason for this is likely explained by more claimant attorneys applying the common-law definition of fiduciary duty when filing claims[1]  both in arbitration and litigation.  For instance, as discussed in Another Breach of Fiduciary Duty Case Involving Life Insurance, an “[agent/broker] … presented himself as a seasoned expert”, “presented [his] recommendation as being in the [client]’s best interest” and the client “followed [agent/broker]’s direction and recommendation” “believing that [agent/broker] was acting in their best interest”. 

Similarly, a 2009 arbitration case involving breach of fiduciary duty “concentrated on the fact that two brokers had clearly stated on their business cards and similar correspondence that they were ‘financial consultants’ [which] identified a competency and knowledge that a prudent man would reasonably assume” and were “no longer just ‘salespeople’”.  The arbitration panel found that “[defendant] breached its fiduciary duty toward [claimant]” and “the plaintiff was awarded a substantial claim.”[2]  

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 was/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 involving life insurance[3] , 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.


1 http://www.investmentnews.com/article/20100122/FREE/100129956

2 Errold F. Moody, Jr., Expert Witness http://www.efmoody.com/

3 In Re: Cochran901 NE 2d 1128 (Ind. App. 2009)

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