Are broker/dealers forcing advisers to violate their fiduciary duties?

By Roccy Defrancesco

The Wealth Preservation Institute


Some securities licensed advisers may take offense to this article. That is not my intent. My intent is to be honest and tell readers what’s really going on in our industry. It's a chapter from a book I'm working on, but not yet in “final” form (To download the 33-page chapter, please visit the My Shares section of my profile). You have the opportunity to read the chapter and give me feedback and suggested changes.

Definition of fiduciary duty — The legal duty to act in the best interest of a client. The first question is: Who has a fiduciary duty to their clients? If you ask clients, they will say anyone giving them financial/retirement planning advice has a fiduciary duty to give them advice that is in their best interest, not simply advice that protects and benefits the adviser or broker/dealer.

What is a broker/dealer? — A broker/dealer is a company that is in the business of buying and selling securities.

What is a stockbroker? — An individual who sells securities to the general consumer (the client). The adviser typically has a Series 63 and 7 license and must sell securities through a broker/dealer. Properly licensed RIAs do not have to sell securities through a broker/dealer.

What does a broker/dealer do? — In addition to being the clearing company that allows stockbrokers to sell stocks, mutual funds, etc., a broker/dealer is supposed to function in an oversight capacity, meaning the broker/dealer is supposed to make sure that the advisers it licenses are “doing the right thing” for their clients.

Broker/dealer liability — Broker/dealers are liable for the acts of their licensed advisers, including selling unsuitable investments.

Broker/dealer compliance — To most, compliance is a four letter word. Broker/dealers monitor communications (e-mails, letters, advertising) between their licensed advisers and clients and the general public. Compliance is supposed to make sure advisers are selling securities and other products in a suitable manner.

Protecting the broker/dealer, not the client
It is my opinion that many broker/dealers are more about protecting themselves from lawsuits than helping their licensed advisers provide the best advice to their clients. How do many protect themselves from lawsuits? They limit the type of advice and products that can be sold to clients. If clients knew that an adviser they were working with had a list of topics that they are forbidden from talking about or selling, what do you think their reaction would be? How many clients would want to work with an adviser who has his/her hands tied by a broker/dealer?

What types of advice and products are off limits?
It depends on the broker/dealer. However, the following is a brief list of the ones I find the most offensive:
  • Life settlements
  • Reverse mortgages
  • Fixed indexed annuities
  • Equity indexed life insurance (EIUL)
Fixed indexed annuities (FIAs)
This one and EIUL in particular really rub me the wrong way, and I think they help some advisers violate their fiduciary duties to their clients.

What are the benefits of an FIA?
  • Money never goes backwards
  • Growth in the market up to a cap
  • Gains are locked in annually and can never be lost
  • Some products have guaranteed income riders
  • Some products have a free long-term care benefit
Potential fiduciary duty violation example — Assume the example client is 50 years old and has as his main asset a $500,000 IRA. His goal is to grow wealth in a protected manner (he’s scared of the stock market), and he is most interested in generating the maximum guaranteed income possible in retirement, starting at age 70.

What advice might a securities licensed adviser who works with a broker/dealer that ties his hands suggest?
    1) A properly balanced mix of stocks, mutual funds and bonds that can grow over time and create an income in retirement. 2) A variable annuity (VA) with a GIB rider.
What are the pitfalls with the above, and why could offering only these two options be a violation of the adviser’s fiduciary duty?
    1) The client said he wanted to grow wealth in a protected manner, but there is nothing protected about a properly balanced mix of securities. Also, these portfolios assume a certain rate of return will occur over the life of the client. If it doesn’t, or if the client lives too long, the account will go to zero.

    2) VAs with income riders are okay, so long as the client is willing to give up better guarantees elsewhere for the opportunity to earn higher returns. FIA GIB riders are superior or far superior to VAs. If you have not read my 33-page white paper detailing the math, click here to dowload it.
Using an FIA? — If the example client purchased the best FIA with a GIB rider offered in the marketplace today for this fact pattern, he would have the following — guaranteed:
  • Accumulation value at age 70: $2,563,526
  • Annual guaranteed income for life: $153,812
The fiduciary violation question

If this product exists, shouldn’t a securities licensed adviser bring it to the table as an option that could help this client grow his wealth for retirement? I can give you my opinion, but what would the average person say? Yes! The average person is the one on a jury. Why won’t thousands of securities licensed advisers give advice on FIAs? Because their broker/dealer forbids them from selling them. I recently asked a Mass Mutual adviser if he could sell either FIAs or EIULs, and look at the quote from his e-mail response: “To answer your questions, we are licensed to sell FIAs, but we are not allowed to sell them under our agent's contract, Mass does not have an FIA in its product line and we would be terminated if we sell the product. Even our outside brokerage operation will not allow us to sell any indexed products.”

Is such a stance by a broker/dealer good for consumers? No! In case you wondered, if the client put his money in a “properly balanced mix of stocks, etc.,” earning a “net” 5 percent each year, he would only be able to take out $153,812 between ages 70 and 81. At age 82, the client would run out of money.

Summary The reality in our industry is that there are thousands of advisers who have their hands tied by the firms they work with. Does that make all such advisers bad? No. However, if these same advisers do not disclose to their clients their limited ability to help them fulfill their financial planning/retirement planning goals, I believe a valid argument can be made that these advisers are violating their fiduciary duties to their clients. And for those of you who think I’m picking on securities licensed advisers, I have upcoming articles on “bad” insurance agents and two chapters in my book explaining to the general public what makes a "bad” life insurance agent.

What broker/dealers forbid the sale of FIAs and/or EIULs?

I know Mass Mutual is one. I have inquires in to State Farm, Allstate, Ameriprise, New York Life, Northwestern Mutual, and Met Life. The PR departments at Mass Mutual and State Farm refused to answer my questions. I’m still waiting to hear back from the others. If you know the official company stance of the other companies listed and want to help me with the answers, that would be very much appreciated.