Originally published on the Conflict of Interest Blog, July 10, 2017
By Knut A. Rostad
Introduction. This commentary would never be written in most professional settings today. The reason: avoiding conflicts obviously matters. It’s self-evident. Yet, in many quarters in brokerage and investment advice, it’s not self-evident at all. Instead, in these quarters conflicts are deemed quite acceptable or even beneficial. This is why the commonsense and logic in the voices of these eight investment advisers is important. In the market place today, they are usually overwhelmed by conflicted product recommendations that are packaged as “trusted advice.” This is why the research was conducted and this commentary was written.
On July 7th the Institute for the Fiduciary Standard released a white paper on Securities & Exchange Commission (SEC) registered investment advisers’ (RIAs) disclosure of various conflicts of interests. The disclosures are drawn the form ADV, an SEC required disclosure, of 135 RIAs. 1.This paper focuses on 25 of the 135 RIAs that go an additional step and further minimize their conflicts by refraining from certain practices. The 25 firms are identified and eight firm principals comment on ‘Why avoiding conflicts of interest matters.’
Their remarks address topics from the philosophical to the practical. They can be distilled to ‘Avoiding conflicts is essential to providing true advice.’ Of particular note:
– These firm principals believe their mandate is to avoid conflicts; it is not to disclose conflicts. Why? Disclosing conflicts can limit or taint the client relationship, add burdens to the firm and confuse staff.
– Avoiding conflicts reinforces objective advice. Clients sense the difference, that objective advice is not conflicted advice and a product recommendation. They sense the difference between a client advocate and a product advocate. With a client advocate, clients tend to be more trusting and respectful and have deeper advisor relationships. They show greater confidence in the advice rendered and in their own financial situation. This is powerful.
The eight advisors (and firms) are: Michael Delgass (Sontag Advisory), Derek Holman (EP Wealth Advisors), Joel Isaacson (Joel Isaacson & Company), Josh Itzoe (Greenspring Wealth Management), Ross Levin (Accredited Investors), Dan Moisand, (Moisand Fitzgerald Tamayo), Tom Orecchio (Modera Wealth Management) and Patrick Sweeny (Symmetry).
The full remarks of each advisor are in the paper linked to above . Key excerpts are selected here.
Early career experiences in brokerage firms
Patrick Sweeny, “I was taken aback by how much pressure there was (at a brokerage) to sell proprietary products… Derek Holmanadds he was told, “Success in the industry depends on selling and not on advising.” Tom Orecchio recalls he started in a firm with commissions and an annual sales contest where prizes and trips were awarded. “I was never comfortable. These incentives changed behavior and I did not like what I witnessed.”
Fees, planning versus asset growth
Joel Isaacson, “There is a tension between planning and asset management growth. Planning is as close to pure advice as we can get, where we can provide the greatest value.”
Clients: Conflicts undermine the value of your advice
Ross Levin says his clients know, “They receive our advice for only one reason … we believe it our best advice.” Dan Moisandsays it this way, “Clients take advice more to heart when they know it’s true advice.” Holman, who dropped insurance licenses three years ago, “There was always confusion when we would switch and disclose our sales biases. This was not the way we wanted to provide advice…. Straight fee only provides clarity and simplicity.”
Sweeny stresses, “We take a lot of time to make sure investors understand what they are paying. Total cost transparency is so important.” Holman adds, “Most investors we meet pay more in fees but don’t see it. With us, they generally pay less, but see it. When investors don’t see the fees they tend to think the services are free.” Josh Itzoe, “Full fee transparency … (creates) a depth of trust you can’t get otherwise. At the wire houses we felt conflicts and the lack of fee transparency created more of an adversarial relationship.”
Conflicts, professionalism and trust
Michael Delgass points out how “Firm culture matters. We aim to “walk this walk”, in part, by embedding issues of fiduciary due care and loyalty into our annual employee and executive reviews. Itzoe, “There is no doubt in my mind that conflicts around compensation prevents the advisory industry from being recognized as a true profession.” Moisand says conflicts must be avoided because managing conflicts doesn’t cut it for clients or the firm. “Managing conflicts requires the firm follow additional procedures… I don’t worry about conflicts I avoid.” Levin concludes, “Nothing is completely without conflict, but reducing conflicts as much as possible increases the likelihood of receiving objective, client-centered advice.