Schwab Ads Place Clients and Fiduciaries Front And Center

Finally, ads that put investors and independent registered investment advisers in their place.

Front and Center.

Schwab has a powerful set of ads featuring independent, objective, fiduciary advice in the investor's best interest . Schwab executive Susan Forman told InvestmentNews : “This campaign is, in part, an effort to break through the confusion that exists among many investors about the difference between traditional advice models and the independent financial adviser," according to the article .

It looks like a terrific campaign by Schwab, and one that will go mainstream, like John Oliver's video about his firm's experience with a 401(k). The 21 minute video already has 3.3 MILLION views!

Fiduciary advice is going mainstream and this is historically great for investors . It will enable retirement investors to accumulate much, much more in their nest eggs without having non-fiduciaries siphon off easily half, or two-thirds as the video notes, of retirees' hard-earned savings.

But it goes much further than that. Most financial intermediaries, across all financial services models, want to put investor client's interests first, according to four years of fi360 Fiduciary survey results . The majority of these intermediaries support the DOL's fiduciary requirements and also believe that advice on rollovers from IRA accounts should be fiduciary - in the investor's best interest.

But the many intermediaries (not required to be fiduciary) who have worked to put their clients' best interest first, while in the brokerage and insurance models, have had to swim upstream in a world where products are larded with commissions and fees, up-front and ongoing. These intermediaries are ranked on production -- how much they sell and how much revenue they bring into the firm and for themselves. They're paid to sell to investors. Kudos to those who make their best effort despite of the lack of support from firm management.

Firms that want to be in the retirement business will have to provide fiduciary support to well-meaning intermediaries; while those who deny fiduciary care will have to leave that part of the financial services industry. A handful will leave, and that is undoubtedly a good thing.

That is fair.

Some will lead.

Schwab is leading the way with one of its biggest constituent (and revenue generating) groups, independent RIA firms. It's a great thing because there is enormous value in the fiduciary advice these firms provide, for a fee, to investors.

Non-fiduciary firms may want to take note of Schwab's action. And as non-fiduciary firms know: if they want to be in the retirement business they will have to make the transition to fiduciary status, and actually place clients' best interests before their own bottom line. They will need to change their culture, how they rank financial intermediaries (certainly it won't be in how much they sell anymore), and how they pay them -- as professionals, for genuine, fiduciary advisory service based on prudence, and investment fiduciary competence (not with conflicted commissions on products that are not in the investor's best interest).

For non-fiduciary firms that make the transition to fiduciary status , the result will be a professionalization of the investment industry and support for the majority of intermediaries who want to put clients' best interests first.

No longer selling products for the embedded commissions, intermediaries will need -- and get -- investment training instead of sales training. Training -- not in how to sell, but in investment theory, diversifying clients' assets, financial planning and in the fiduciary process.

Intermediaries' rankings won't be based on "production" anymore. It will be based on other metrics -- on client satisfaction and longevity with a firm, client goals met, outcomes and referrals.

Compensation, likewise, will be different -- based on professional fee sand metrics as in the legal, accounting and medicine professions. Hours spent working with clients, client needs fulfilled, financial plans completed, monitoring of portfolios and plans, and assets gathered will all play a role.


Duties of Loyalty and Due Care

To enable firms and intermediaries to make this transition to a true advisory profession, independent of product "distributors," firms and intermediaries will need to exhibit both loyalty to clients and process for exercising due care of clients' financial wellbeing.

Fiduciary Excellence

Excellence in fiduciary process means fiduciary firms use fiduciary best practices backed in regulatory statute and law to ensure that they always act in their clients' best interest, such as those outlined in " Prudent Processes for Investment Advisors ," from fi360 and the Centre for Fiduciary Excellence ( CEFEX) . These processes are very good for clients and firms -- RIA firms that have been certified to the Global Standard of Fiduciary Excellence grow nearly twice as fast as non-certified RIA firms.

Fiduciary firms share a number of characteristics. They:

  • have written policies in place that guide decisions affecting clients and management of the firm, such as an RFP or other written process for selecting, and periodically monitoring vendors.
  • have an investment policy statement signed by each client -- the road map for client's long-term success based on the client's background, time horizon, risk tolerance, goals and needs.
  • have a written agreement signed by each client, clearly spelling out responsibilities, costs and fiduciary duty.
  • possess or acquire the competence, knowledge and diligence to prudently diversify and manage their client's portfolios.
  • monitor clients' portfolios and have criteria in place to guide decision-making when an investment may need to be replaced.
  • avoid conflicts of interest.
  • if a conflict is unavoidable, fiduciaries clearly disclose the conflict, ensuring that the investor understands it, and then manage the conflict in the investor's best interest.
  • control the investor's all-in costs. This includes reasonable fees for advice or investment management and any fees paid to outside investment managers or other vendors. Fiduciary care extends to prudent selection of other fiduciaries or vendors needed by investor clients.
  • clearly disclose all material facts, in such a way that the investor can understand them.
  • Products are already available and more are in development that have less compensation embedded in the product. A true advisory fee works the same way with investment fiduciaries as it does when one pays a professional -- doctor, lawyer or accountant and so on. The appropriate products will be recommended to to meet client's goals -- and this will make no difference in how the intermediary -- or firm -- is paid.

    It costs less, not more, to run compliance at a fiduciary firm

    True fiduciary advisors who act in the best interests of their clients pay much less for errors and omissions insurance. Their compliance costs are much lower than brokers and insurance agents costs.

    Why? Because if the model is to act in clients's best interests, instead of sell them whatever that pays the maximum seller's compensation (with commensurate harm to the investor), clients achieve better outcomes and are less likely to have reason to bring action against firms and intermediaries. The fiduciary model generates fewer claims and costs less to insure.

    Campaigns against the DOL Fiduciary Rule and other efforts to allow non-fiduciary firms to slither out of the responsibility to place the investor's best interests before their own and to keep the anti-investor status quo will fail.

    As custodian to many fiduciary registered investment advisers' clients, the impact of Schwab's ads will be ... HUGE!