Holistic, fee-based advisers in the US that operate under fiduciary standards are gaining prevalence over transactional, commission-based investment advisers, Morningstar’s managing director of Australia and New Zealand has said.
Speaking at an Institute of Managed Account Professionals seminar in Sydney yesterday, Jamie Wickham said the trend towards fee-based advice in the US is growing in part due to a regulatory push for laws equivalent to our own best-interests duty.
“With regulation, there has been a lot happening over the last few years,” Wickham explained. “First, there was the fiduciary rule proposed by the Department of Labor (DoL) – that has since been squashed by [US President Donald] Trump. The [US Securities and Exchange Commission] has since picked up that mantle, and they have what’s called the ‘regulation best interest.’ ”
Wickham said that while the idea is only a proposal at this stage, the momentum for regulation that protects clients is growing. There are two types of advisers in the US, he said, with distinct payment models that affect the way they do business.
“There are registered investment advisers (RIAs), who are fee based and operate under a fiduciary standard and are self-licensed; and then there are investment advisers – typically employed by a broker-dealer – who have historically been more aligned with stockbrokers. They’re transactional, more aligned with selling product, and they align under a suitability standard. Today, they’re still getting paid via commission,” Wickham explained.
Professional Planner reported on the DoL’s struggle to gain full acceptance for fiduciary rule (also known as the duty of loyalty) in an interview with US adviser Michael Kitces earlier this year. Then, Kitces said the duty of loyalty represented a “classic obligation to act in the best interests of the client”, and was a “divisive topic”.
Then, as now, the issue is around to whom the rule applies. The DoL attempted to get the rule expanded to include any financial professional providing a recommendation, including investment advisers. Trump allowed the proposed bill to die after winning the US presidential election.
This set the regulatory movement for advice back, Kitces said, who also remarked that the US standards are “much, much lower”.
“Frankly, in Australia, your regulators are way ahead of ours here in the US,” Kitces said.
Wickham made similar remarks in Sydney, saying that while the US is moving towards a fee-based sector, “in many ways, the US is behind Australia in this regard”.
The market is changing, however, Wickham said. He explained that the RIA segment, which operates under the current fiduciary rule, is growing, while the less-regulated investment advice segment is starting to stagnate.
“There’s certainly a shift, regardless of the regulation, away from transactional and commission-based sales to holistic financial planning,” Wickham said. “That is going to continue as the RIA space continues to grow; it’s probably the only advice space that has grown in the last five years.”
A cause of inappropriate advice
The link between remuneration models and best-interests duty is clear, and has been raised by Commissioner Kenneth Hayne at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Hayne identified commission-based fees as a cause of inappropriate advice and said that they clashed with the client’s best interests.
“So long as advisers stand to benefit financially from clients acting on the advice that is given, the adviser’s interests conflict with the client’s interests,” Hayne wrote in volume 1 of his interim report.
In questions posed to stakeholders before his final report, Hayne asked: “Should any part of the remuneration of financial advisers be dependent on value or volume sales?”