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The Practice Doctor is IN

The Case for Financial Advisor Standards

by Al Depman, CLU, ChFC, CMFC, BH
Practice Management Consultant

Al Depman photoIn 2007, Minnesota Attorney General Lori Swanson's office sued Allianz Life Insurance Co. for improperly selling deferred annuities to senior citizens. The state prevailed, and even though Allianz admitted no wrongdoing, a settlement process was initiated.

Allianz and the attorney general's office jointly decided to offer policy owners several settlement options. As part of this effort, a small cadre of independent financial services professionals was co-selected by Allianz and the attorney general to contact and review options with the wronged consumers, ages 65 and older. I was among the financial services professionals selected to participate.

The experience was eye-opening. When meeting with a policy owner, I first asked "in your words, what did you think you bought?" Of the 40 or so seniors I worked with, I received nearly 40 different responses. Some thought they'd gotten an investment vehicle with guarantees, and others thought it was a steady income stream.

In short, it was evident the agent failed to convey what he was selling. Purposely or not, the consumer was bamboozled. Most of the folks I talked to were sold in a one-meeting, pressure-packed event.

As a practice management consultant, my core clientele consists of financial services advisors. My Allianz experience has informed this work. Specifically, I teach that at the time of a sale, the advisor should step back and ask the client "in your words, what did you just purchase and why?" This will help the advisor determine if the client "gets it." In addition, at regular intervals, the advisor should continue to reinforce the "why" of the planning being done.

This brings us to the Department of Labor and its proposal to require financial advisors to have a fiduciary responsibility to their clients and their retirement money. A fiduciary simply means the advisor must act with the client's best interest in mind rather than looking to increase his or her own income.

A little history may help. When the fiduciary standard was set in 1975, 401(k) plans did not exist, IRAs had only just been authorized, and most retirement plan assets were in standard pension plans and managed by professionals. These professionals generally worked for large money management companies and were subject to the fiduciary standard because millions of employees relied on them to have secure payouts at retirement.

Today, pension plans and guaranteed retirement payouts are nearly obsolete. As a result, most individuals are responsible for their own retirement investing and income planning. Lacking expertise in this area, many of those individuals turn to financial advisors.

These advisors are only required to give consumers advice under a "suitability" standard, not a fiduciary standard. This "suitable" advice is based on the client's goals, risk tolerance profile and ability to read a prospectus. Legally, the advisor has a minimal interest in monitoring the client's investment after that, hence the temptation to grab fees and commissions and run. Under a fiduciary mandate, advisors would be held accountable to ensure the retirement funds continue to be appropriate over the years.

In consulting with hundreds of financial advisors throughout the years, I am of two minds on this issue.

First, the Allianz experience points out the need for tougher regulation.

Second, the majority of advisors in my consultations keep their primary focus on their clients. They would not benefit from an additional layer of bureaucracy and compliance. They must make a living from commissions on insurance products and fees for managing investments or for providing advice. I've held many discussions on ethical issues this can create but always come down on the side of transparency as to how the advisor is compensated.

However, the tipping point for me is that in the highly competitive world of financial advising, most of the money being made is from moving money from one place to another: "My product or investment scenario is better than the one you have. Plus, I'll save you some money." These "rollover" transactions provide the window to abuse fees and commissions the Department of Labor warns consumers about. In this money-movement culture many firms employ very tight compliance departments to discourage the improper sale and replacement of financial products.

My conclusion, fed by the Allianz experience and 30 years of working with financial advisors, is the fiduciary standard is a good thing and ought to be the rule—with one caveat. If an advisor's compliance rules and regulations are already stringent enough to easily alter the "suitability" standard to a "fiduciary" standard, we don’t need to add more layers of regulation to them. Instead we should fine-tune the existing language.

Advisors who already think like fiduciaries shouldn’t have to suffer. It's those who create commissions and fees in moving retirement money repeatedly from vehicle to vehicle that need to be reined in. In the end, our goal should be that retirees (and would-be retirees) are able to sleep better at night.

The Doctor is OUT

© 2016 Al Depman

Al Depman, CLU, ChFC, CMFC, BH, a.k.a. "The Practice Doctor", is's Business Practice Consultant, and contributor to "The Wall Street Journal." He is the creator of "The Practice Management Assessment" tool, the key component of The Business Practice Check-Up™, has authored numerous articles in professional publications on practice management, and is the author of the book, How to Build Your Financial Advisory Business and Sell It at a Profit, available from McGraw Hill. Al combined his Liberal Arts studies with 10 years of management experience with McDonald's Corporation to enter the financial services world 25 years ago. Since then, Al has evolved from an MDRT-level sales rep into a full-time consultant specializing in helping others engineer their business practices to the next level. Contact him at

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