Ric vs. Mike the Insurance Agent
By Ric Edelman
Ric shoots holes in Mike's opposition to the fiduciary standard
This spring I did something I’ve never done in my 25 years as a financial advisor: I endorsed proposed legislation and asked listeners of my radio show for their support.
The issue was an amendment to Sen. Christopher Dodd’s financial services reform bill that would require stockbrokers to adopt the fiduciary standard currently required only of Registered Investment Advisors. As I wrote in a previous article, the fiduciary duty requires that advisors act in a client’s best interests. Currently, brokers are not required to behave in this manner.
I’m not the only one who supported the amendment. Every regulatory group supported the measure, including the North American Securities Administrators Association (a group of state regulators), the Securities and Exchange Commission and FINRA, as well as the Certified Financial Planner Board of Standards, the Financial Planning Association, the National Association of Personal Financial Advisors, AARP and the Consumer Federation of America.
Unfortunately, the Senate version of the bill failed to include the provision. But my endorsement did generate a telephone call from a listener, who left me a lengthy message expressing his displeasure. (Actually, the word he used was “disgust.”) Here is Mike’s voicemail, followed by my response:
Hi, my name is Mike. I’ve listened to Ric on the radio for probably close to 20 years here. I’m an insurance agent. I was listening to him talk about the new proposed Senate amendment and I’ve always liked Ric; I was very disappointed to hear him leave out several material facts about the amendment.
Number one, it’s never been debated. Number two, it’s never been open for public discussion. Number three, no study anywhere has ever proven anyone was harmed by everybody not being an RIA. So Ric’s assertion that this is obvious and indisputable is patently false; he has made it up. And he has done a disservice to himself by lying to everybody. I’m very disappointed in his partisan, unbelievable self-servingness about this. He didn’t say anything about RIAs having to charge 2.5% on accounts that are opened at $50,000. That’s material; he should be ashamed of himself, and I intend to find him on Facebook and everywhere else and just expose what a self-serving coward he is to treat this issue, which is very important, so cavalierly.
I’m disgusted. I’m very, very disappointed in Ric. Thank you very much.
Wow. That’s pretty strong language. Yet everything Mike said is wrong. Here’s the truth about the situation.
Although Mike claims that the issue has never been debated, up for public discussion or studied, the fact is that the advisor vs. broker debate has been going on for more than 15 years. It began in April 1995 when the Securities and Exchange Commission created a commission to investigate conflicts of interest in the brokerage industry. The result was published in a report known as the Tully Report (named after the commission’s chair, Daniel Tully, then chairman and CEO of Merrill Lynch), which concluded that “the prevailing commission-based compensation system inevitably leads to conflicts of interest among the parties involved.”
The Tully Report went on to list best practices, including compensating advisors based on client assets instead of transactions. Such a compensation structure would avoid the fundamental conflict of interest created when a broker is only compensated when a client buys and sells investments.
Four years later, in 1999, the SEC proposed a rule that would let brokers offer fee-based accounts; in such cases, advisory services were considered incidental to their business. In 2005, after six years of debate (which included a lawsuit to force the SEC to either make the proposed rule final or kill it), the SEC finally adopted the rule. As part of that rule, the SEC began requiring brokerage firms to publish a disclosure on brokerage statements that says: “Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and sometimes by people who compensate us based on what you buy. Therefore, our profits, and our salesperson’s compensation, may vary by product and over time.”
A year later, in March 2006, the SEC announced it would conduct a study to see whether the rule was effective at protecting retail customers. In 2008 that study concluded that investors fail to understand the differences between investment advisors and brokers.
Things continued to get complicated. In March 2007, the U.S. Court of Appeals ruled that the SEC’s rule was invalid, because brokers do not act as advisors and they therefore cannot be permitted to sell an advisory-based account. Given the court’s ruling, the SEC asked Congress to resolve the issue; that July, nine members of the House of Representatives wrote to the SEC asking for its response to the court’s decision. It’s been on and off the Congressional radar ever since.
No debate, public discussion or studies? Sorry, Mike, but you’re dead wrong.
I’m not sure I understand Mike’s assertion about advisors “having to charge 2.5%.” Not only is that statement not true — many advisors charge hourly rates — but fees have nothing to do with the issue of serving the client’s best interests. I don’t care if Mike charges his clients fees or commission; all I’m saying is that Mike should be required to serve his client’s best interests.
Why does Mike hate that idea so much? I don’t know the answer to that question, but I do know he’s not alone in his opposition. Others who are on the record in opposition include the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors and the National Association of Independent Life Brokerage Agencies. In a joint letter to Congress last November, they argued that adhering to the fiduciary standard would force life insurance agents to “take on more responsibilities, more expenses and more liability” and would ultimately limit consumer choice. In other words, the industry would not be able to sell some of the products it currently sells — presumably because those products do not serve the best interests of consumers.
But isn’t that the whole point?
My bet is that Mike, like the vast majority of insurance agents, is honest, ethical and hardworking. Mike probably doesn’t even sell the kinds of products that would be banned under the fiduciary standard. So, since he’s already acting in his clients’ best interests, why is he reluctant to put it in writing and make it the law of the land?
Interestingly, encouraging Congress to create a level playing field between them (stockbrokers and insurance agents) and us (investment advisors like Edelman Financial) would remove a competitive advantage that my firm currently enjoys; many consumers choose us over them because they know we are required to serve their best interests and they are not. Since this amendment would eliminate my advantage, is calling me a “coward” accurate?
As for his threats to slander me on Facebook and elsewhere, well, I just hope he spells my name correctly.