by Prof. Robert Bloink and Prof. William H. Byrnes

Are You Part of “One of the Greatest Scams of Our Time”? You are if you offer investment advice on anything other than a fee-only basis, according to one author. In a scathing attack on the financial advisory industry, Business Insider, Clusterstock contributor Andrew Haigney slammed investment advisory firms, calling their services “one of the greatest scams of our time.”

Haigney said, “The underlying problem is that investment advice has become a ‘product,’ and investment advisers steer prospective clients right into their own products.” The jumping-off point for his argument is a New York Times op-ed by David Swenson, Chief Investment Advisor of Yale University, that pans the mutual fund industry and its “punitive fees.” The conclusion of Mr. Swenson’s argument, and the premise of Andrew Haigney’s article, is that advisors must be scamming their clients if they are not offering them all low-cost index funds.

Do not make the mistake of assuming his article is just another expose on the bad behavior of a few advisors. Haigney does not pull any punches, and he is not talking about a few bad apples. He is making broad assertions about the entire industry and all its participants.  Haigney claims that investment advisors do not counsel their “prospective lucrative clients” to invest in low-cost funds.

Many advisors reading Mr. Haigney’s article probably find themselves shouting “fiduciary duty” at their computer screens, but Mr. Haigney foresaw the objection and explained why the fiduciary standard applicable to advice given by RIAs is not all it is claimed to be.

According to Haigney, the lack of a consensus definition of “fiduciary standard” contributes to its downfall. But the fiduciary standard has always been an amorphous concept in British and American law. There cannot be one single, clear definition of fiduciary standard, and that’s the way it should be. Tying the principle down to an “all-encompassing” definition will not catch every possible permutation of behavior, and bad actors will always be able to find a loophole to fit their bad acts through.

Although some specific rules promulgated by FINRA and the SEC define “fiduciary duty,” it must always keep some of its amorphous character. That gives regulators and courts the leeway to halt bad advisor behavior when they see it—regardless of whether a specific rule defines the behavior as a breach.

Mr. Haigney apparently believes the nebulous fiduciary standard is toothless because all conflicts of interest can be disclosed away. According to Mr. Haigney, because disclosures are generally incomprehensible to our clients, the standard is impotent and does not offer a solution to the problems plaguing the investment advisory world.

If client abuse in the name of commissions is rampant in the advisory world, what is to be done about it? Mr. Haigney suggests that investment advisors be required to make side-by-side comparisons between their proprietary portfolio management services and low-cost index funds. We are left wondering how that would work. Would it be enough to show the chart and then explain it away? We can all come up with a hundred reasons why index funds are inappropriate for many of our clients. Should results be compared over a ten-year span? Longer? Shorter? Mr. Haigney’s suggestion sounds simple enough, but the more we dig into it, the more difficult it is to pin down and apply to any practical situation.

If most of the industry is corrupt, where can you turn for unbiased advice? Haigney himself is a managing director of El Cap, a Vermont RIA “that provides investment-consulting services.” As a fee-only—as opposed to fee-based—advisor, he is immune from his own harsh criticisms.

It is not that the premises of Mr. Haigney’s article are invalid—there is undeniably a segment of the financial advice industry that puts commissions before clients. It is the universal scope of his assertions that is questionable. Does he really believe that fee-only advisors pushing low-cost index funds are the best bet for most, if not all, investors?

For a complete discussion of financial advisors go to Advisor’s Journal.  For previous coverage of the fiduciary standard in Advisor’s Journal, see Study Finds that Universal Fiduciary Standard Will Hurt Investors (CC 10-97).

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