Advisors Claim Fiduciary Duty Would “Sink Many Small Dealers”
The long line of excuses for poor service continues with this Investment Executive article, which details all the good reasons that advisors should not be held to a fiduciary standard of duty (in other words, legally bound to do what they keep promising).
The article goes into all the liability that they would face if they made a bad recommendation that caused a client to lose money. For example it says that advisors couldn’t protect themselves by saying the client understood the risks, because “CSA’s consultation paper indicates that the vast majority of clients are assumed to have little financial knowledge, and therefore can’t be expected to comprehend the risks – even if they were appropriately disclosed and explained”.
The article goes so far as to make it sound like advisors would be sued by every client just because they could have made a slightly better decision if they knew the future, saying “The client bears absolutely no responsibility for his or her poor choices, even though the client is the ultimate decision maker”.
However, I wonder if this opens up a big hole in the concept. A lot of clients probably don’t follow their advisor’s recommendations. So if the advisor recommends one thing and the client tells them to do another, is the advisor still liable? If not, that could leave a lot of clients still vulnerable to bad investment decisions. In fact there might be room for sneaky advisors to softly say the “right thing to do” while also hinting that there is a much better investment (that also generates more fees) to entice clients to override the advisor’s recommendation.
On the other side if the advisor is still liable for following the client’s instructions, then a lot of clients would probably end up being upset that their advisor won’t do what they want and will even leave the advisor.
There don’t seem to be any easy answers for this, but I would imagine that full disclosure of the fees that clients are paying would also help avoid many hidden dangers. That way clients could at least see that certain investments pay the advisor a much higher fee, without having to dig in to a 90-page report. They might still choose to believe that it costs more because it’s better, but I think a lot of people would be more cautious if they knew that their choices resulted in thousands of dollars in additional income for their advisor. In the end I’m glad that I don’t need to trust someone else to make decisions for me.