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FA Resistance to Transparency May Drive Clients Away

By Alex Padalka April 3, 2017

Regardless of the fate of the Department of Labor’s Conflict of Interest Rule, investors may start steering clear of brokers who aren’t transparent about their fees, Preston McSwain, managing partner and founder of the RIA firm Fiduciary Wealth Partners, writes on the CFA Institute’s website.

The ongoing debate about the rule, which aims to force retirement brokers to curtail apparent conflicts of interest but now faces a delay, is really all about transparency, according to McSwain.

Opponents of the rule may argue otherwise, but the fact of the matter is that pay-to-play arrangements are still a major component of the advice industry, he asserts. Likewise, many clients still can’t get a clear picture of their assets in investment reports that span hundreds of pages while fee disclosures are hidden away in fine print, McSwain contends.

The industry is resistant to any additional regulation requiring further disclosures such as the DOL’s fiduciary rule, claiming they’re already under significant regulatory burdens from Finra, the SEC, the Office of the Comptroller of the Currency and state regulators, he writes.

Still, a 2016 study by the CFA Institute and State Street found that only 28% of investment professionals are in the business because they want to help clients, according to McSwain. As for clients’ best interest, 36% believe that putting it first would mean additional career risk, according to the survey of more than 3,300 investment professionals.

Preston McSwain

Advisors shouldn’t be resistant to change, he writes. More transparency requirements would take away the hard-to-resist opportunity, for example, to collect 12b-1 fees on selling mutual funds and then obscure the disclosure about them, according to McSwain.

This could go a long way to fix the image problem the industry currently has, particularly with younger generations who could become clients if that image is repaired, according to McSwain. In any case, those in the industry who continue to protest any additional transparency may find that investors go to their competitors who embrace it, he writes.