In the past three years, Wall Street firms have ramped up fiduciary training for their financial advisors ahead of rules, and market trends, that may demand it. So why don’t they want you to know about it?
Wall Street brokerage giants like Merrill Lynch and UBS have been minting fiduciaries left and right over the last three years, though it’s unlikely you’ve heard about it. None of the firms will go on record as to whom specifically in the rank and file is adopting the standard, nor will they provide much detail on what that training looks like.
And yet, Fi360, an outside vendor that specializes in fiduciary training, says at least three of the big four wirehouses have invited it in to conduct classes for advisors who serve retirement and discretionary accounts, and interest is accelerating. (It won’t say which firms.) Rival training firm 3Ethos also says it is in talks with wirehouse firms and other broker/dealers to offer classes. Cerulli Associates backs them up on this. Plus, a number of Merrill Lynch sources say Merrill is rolling out its own internal fiduciary designations—for both retirement and high-end retail advisors—and requiring them to get outside training to qualify. Holding the internal designations would allow these advisors to tell clients they are acting in a fiduciary capacity.
It makes sense. Training advisors could help the firms stay ahead of new rules expected out of Washington that would hold all brokers and all advice on retirement accounts to this debated code of conduct, which demands, in essence, that all investment decisions be made in the best interests of the client. Today, many brokers operate under a less restrictive standard that holds investment decisions are proper if they are merely “suitable” for a client’s situation.
The shift also reflects the simple fact that wirehouses are adapting to bigger industry trends; namely fee-based pricing and comprehensive planning models, which are held to the fiduciary standard, and where smaller rival investment adviser boutiques hold an advantage. Investment advisers already tilt heavily towards fee-based comprehensive planning, and act as fiduciaries. And who will be satisfied with a financial advisor whose decisions will be merely “suitable” when others promise to put them first?
Here’s the confusing part. Who is held to what standard and when is a murky business. Today, all advisers and brokers must adhere to the fiduciary standard when they provide financial planning for a fee on assets, when they take discretion over client accounts (make individual investment decisions without explicit client approval) and when they offer advice on certain kinds of retirement accounts (not including IRAs). Those advisors who hold a certified financial planner (CFP) designation, which accounts for about 15 to 20 percent of wirehouse advisors according to Aite Group research, are also expected to adhere to the fiduciary standard.
But brokerage accounts and product sales (as well as “free” financial planning) are governed by the suitability standard, unless there is some disclosure that says otherwise. Meanwhile, many advisors are dually licensed, and switch hats, playing a dual role with a single client; this is typically governed by account contracts.
Regulators don’t endorse any of the fiduciary certification companies out there, but adhering to a fiduciary standard can be complicated and often training can help. “I think advisors have a hard time knowing what playing a dual role means, and so there is an effort to clarify that” with training, says Scott Smith, an analyst with industry consultant Cerulli Associates. “Plus, if a universal fiduciary standard is rolled out, the firms will be under an obligation to make it clear to their advisors what it means to put their clients first and what all the decision points would be,” he says. “There is a level of defense here. ‘We brought in the experts.’ I think they want to make sure they have an outside opinion.”
Fi360, one of the biggest players in the fiduciary certification and training market, whose “AIF” (Accredited Investment Fiduciary) and “AIFA” (Accredited Investment Fiduciary Analyst) certifications have been around for over a decade, reports a big bump in interest in its courses from the wirehouse firms. According to CEO Blaine Aikin, the number of classes the firms have signed up for has more than doubled every year since early 2009. That’s a faster rate of growth than for any other advisory channel his firm works with, including RIAs and independent broker/dealers, he says. One wirehouse put 500 of its advisors through the Fi360 program in October of last year.
“The balance has shifted,” says Aikin. The growth on the wirehouse side is coming off a low base, but has been “extraordinarily rapid.” The firms are starting with advisors who work on retirement accounts, but also training those who take full discretion over client accounts, a growing phenomenon, says Aikin.
Don Trone, founder and CEO of 3Ethos, which offers its own “GFS” (global fiduciary strategist) certification, says he is also seeing a lot of interest in his training programs. Trone, one of the architects of Fi360, just launched 3Ethos late last year after his non-compete with Fi360 expired. Since then, he has met with officials at about 15 to 20 major firms, including several of the wirehouses and major B/Ds. “We’re probably conducting a major accounts presentation about once a week,” he says.
Another player in the space is Fred Barstein, founder and executive director of The Retirement Advisor University, who developed the “C(k)P” (certified 401(k) professional) designation. Merrill Lynch requires that its retirement-designated advisors enroll in Barstein’s program, according to one source at Merrill.
“In a different era they might do the training themselves, but these days there are resource constraints,” says Barstein. And then there is the matter of continuing education. “These days, not just in financial services, firms are reluctant to take on full time employees to create training departments, because if times get bad you have to lay off people, cut back.”
One Merrill Lynch advisor who does primarily institutional and retirement business says Merrill just started sending retirement-designated FAs through outside fiduciary training programs a year ago. And in the next couple of months, Merrill will create an official firm-sanctioned “fiduciary advisor role” for its retirement and philanthropy groups, as well as its institutional consulting groups, which serves high-net-worth retail clients, says this advisor, who requested anonymity because he is not permitted to speak for the firm.
Some advisors in these groups are already permitted to tell clients they are fiduciaries, but will be required to undergo a new and rigorous assessment process to continue doing so. The advisor thinks that Merrill will eventually make similar fiduciary training and offerings available to advisors who serve lower-end retail clients; that may come at a cost to the client, however, he says.
The Merrill advisor and his partner, who focus on retail clients, got the AIFA on their own ten years ago, and again in 2003, when Fi360 updated its program. “We think we’re a little ahead of the curve,” he says. As a result of the program, his team made the clients’ costs the focus of their practice. Growth, which had flat lined prior to the course, quickly ramped up to around 16 to 17 percent a year and stayed there. “We are very cost-conscious. Fees matter. We think driving down costs on institutional and retail business has led to growth.”
The firms are very tight lipped on the subject of fiduciary training. Morgan Stanley, Merrill Lynch and Wells Fargo said they have their own internal fiduciary training programs. They do not allow their financial advisors to use the outside vendors’ designations on marketing literature, business cards or in conversations with clients, they said. They were reluctant to say much more and would not make executives available for interviews.
Merrill offered a few details, however. Spokeswoman Selena Morris said the firm rolled out its fiduciary training so it could “be prepared when rulemaking on a uniform fiduciary standard comes down.” Advisors in Merrill Lynch’s Personal Investment Advisory (PIA) program, which allows them to take discretion over client accounts, must get training in fiduciary responsibility, among other things, she said. And PIA is growing: the firm has approximately 4,300 financial advisors in the program, up from 3,700 at the end of 2009. In addition, Morris confirmed that all Merrill accounts that have a fiduciary-advisory component are governed by contracts that spell this out.
But the other firms were less forthcoming. In response to questions about how many of its brokers are fiduciaries and in what capacity, Morgan Stanley would only say that because it is dually registered as a broker/dealer and an investment advisor, the majority of its FAs are also dually registered—licensed to conduct both fiduciary fee and suitable commission business. Wells Fargo said that “a significant percentage of our 15,000 FAs act in a fiduciary capacity in the context of advisory relationships.” UBS did not respond to requests for comment.
“Wirehouses don’t want there to be confusion on the part of the client because the FA is not always a fiduciary,” Aikin speculates. “Most FAs are dually registered so sometimes they are operating in a fiduciary capacity and sometimes not,” he says. This point was echoed by another industry source who declined to speak on the record. But Aikin thinks this reluctance to allow advisors to advertise that they are fiduciaries will change.
Making it known that your brokers are fiduciaries could also invite lawsuits, one lawyer says. “They don’t want it out because they don’t want to give anxious plaintiff attorneys an opportunity to start suing,” says Stephen H. Cohen, who represents broker/dealers as a New York partner at Loeb & Loeb LLP. “They may just be trying to create a culture of helping FAs to know how to be a fiduciary, so that when the law comes out, the reps are prepared. But once it gets out that you have the policy, you could be held to it.”
Cerulli’s Smith agrees. “They’re worried about greater liability in any fashion,” he said. Lawyers might ask, “‘Why are you doing this now? Why didn’t you do this before?’ Plus, the standards that were proposed last year under the DOL kind of scared everybody. There were a number of high-fee 401k plans that thought they were being overcharged, who sued on behalf of all the participants. In those cases they go after the people with deep pockets, the b/ds or the record keepers. If you make a mistake on behalf of 5,000 employees, that’s a problem.”
It could even jeopardize the industry’s lobbying efforts in Washington, Trone says. “While industry groups lobby their positions with the SEC and DOL, no FINRA-member firm wants to take the risk of appearing to be stepping out of line. FINRA-member firms have legitimate concerns about the potential risks of a fiduciary standard, and until those risks are fenced off with ‘fiduciary safe harbor procedures’ prescribed by the SEC and DOL, no one is going to budge. It's the same direction you get from your attorney when you're the subject of litigation – ‘don't say a word; you may jeopardize your case.’”
The fiduciary standard has long haunted the brokerage industry. It has been the subject of numerous regulatory and legal battles over the years. The current industry landscape was mapped out in 2007, when a U.S. Court of Appeals tossed out SEC Rule 202, the so-called Merrill Lynch rule that, for eight years, had allowed registered reps to offer fee-based brokerage accounts—in other words brokerage accounts masquerading as advisory accounts. After that ruling, $300 billion in fee-based brokerage accounts had to be transferred to either pure fee-advisory accounts or pure brokerage accounts.
For now it’s unclear when new fiduciary rules will go through or what they will look like. Under rules proposed by the Department of Labor, brokers providing advice on IRA retirement accounts could come under the fiduciary standard—something that the broker/dealer industry is fighting fiercely. It’s a big deal: most brokers have at least some IRA accounts. Assets in IRA accounts totaled $4.6 trillion at the end of the third quarter of 2011 according to the Investment Company Institute, and Cerulli Associates projects they will grow to $7.3 trillion by 2016.
The SEC, meanwhile, is authorized under Dodd-Frank to write a rule requiring all brokers to adhere to the fiduciary standard when they provide personalized advice to retail investors—though here the rulemaking process is currently stalled as the regulator prepares a cost-benefit analysis to appease some members of Congress. Initially, new SEC rules were slated for 2011, then they were pushed back to 2012, and now they have been taken off the SEC calendar all together. In a recent speech in Washington, SEC Chairman Mary Schapiro says she is still very committed to a uniform fiduciary standard for the entire industry, however. Some now predict a rule will come down in 2013.
The scramble by big Wall Street firms to shift to fees and to the fiduciary standard may have become more urgent as fee-based investment advisers have won market share from wirehouses over the past three years. Some advisors and clients have sought distance from the tarnished brands of the Wall Street firms.
The wirehouse share of retail client assets dropped to $4.8 trillion in 2010 from $5.5 trillion in 2007, according to Cerulli data, and the research firm predicts it will continue to drop from 2010’s figure of 43 percent to 35 percent in 2013. Even more worrisome, the wirehouses are losing market share among the very wealthy clients they traditionally focused on. Their share of the high-net-worth market—those with $5 million or more in assets—dropped to 45 percent at the end of 2010 from 56 percent in 2008.
“We’re seeing wirehouses say we need to make some adjustments to our business model. Let’s go ahead and embrace the fiduciary standard, meet that competitive pressure by allowing at least a segment of our audience, our representatives, to act in a fiduciary capacity,” Aikin says.
But the Merrill advisor doesn’t think that investment advisers have the business advantages they think they have—especially when it comes to the fiduciary standard. “There are people who think that the wirehouses can’t do things that they can do,” says the Merrill advisor. “I love listening to the RIA shops with $100 million in assets at industry conferences—delusions about the services they can offer, the things that they can provide. Being at Merrill Lynch and Bank of America the last few years hasn’t been a picnic, but the balance sheet behind you matters. And when you’re talking about personal liability and fiduciary liability, balance sheet really matters. Places like this have a lot of issues to get through, a lot of moving parts here, but what’s been driven out of our retirement group is extremely good and if I were an RIA I would be nervous.”