Insuring a child’s life is a poor college savings tool

I have a regard for most of the material I read in InvestmentNews, which is why I did a complete double-take when I saw the inconceivable headline “Insuring child to fund college may make sense, some say” in the March 3 issue.

What competent, objective financial adviser suggested that clients accumulate assets for college by purchasing “a whole life or universal life policy on a child at least 10 years before he or she begins college?”

Not surprisingly, the article quotes the vice president of a major insurance company and an adviser whose company website is a sales pitch for fixed and equity index annuities, and other insurance products.

The article’s writer acknowledges the various reasons why insuring the life of a child is an “obsolete” method of saving for college in view of the superior savings opportunities available to families, yet she twists around and uses the article as a platform for this anachronistic sales tactic.

Someone’s public relations person was working overtime to see that something this inane made it past the editors of InvestmentNews.

Barbara A. Warner
Vice president
Warner Financial Inc.
Bethesda, Md.

Some brokers lack certain types of knowledge

I couldn’t agree more with the gist of the article in the March 10 issue “Boomers clueless about Medicare, survey finds.”

After almost 40 years on Wall Street, I recently retired, but I have spoken with many broker friends of mine, and those who are familiar with Medicare, Social Security and long-term care are the exception.

Many of the older brokers are getting insurance licenses just to survive but are still more comfortable selling transaction items in lieu of such longer-term reward products as Medicare gap insurance, LTC insurance, life insurance, etc.

My personal experience with LTC insurance was watching my wife’s aunt and uncle go through their life savings by paying $6,000 month each for in-home care for almost two years before finally moving to a nursing home.

While the nursing home charged the same $12,000 month, they were reimbursed half that amount, making their own funds last that much longer.

Steve Hagendorf
New City, N.Y.

12(b)-1 fees shouldn’t be abolished

What will it take for self-righteous fee-only purists to realize that others in this industry provide services to many who choose not to use or don’t qualify for fee-only advisers, and that such providers need to be compensated for those services?

This compensation comes in the form of a 12(b)-1 fee. It shouldn’t come as a shock that the initial commission earned on a load fund doesn’t qualify that client to a lifetime of services, which can include periodic meetings, performance reporting, basis tracking, beneficiary or title changes, establishing systematic withdrawals, processing required minimum distributions, newsletters, etc.

Most clients are well aware of and gladly pay a 0.25% fee to have access to these services. And if they don’t value those services, then they are free to take their business to any number of widely advertised no-load fund groups, where they will get the level of service for which they pay.

Why do the judgmental consider a sales charge and continuing 12(b)-1 fee such a travesty as compared with an annual 1% advisory fee? What makes one approach so superior to the other for every client situation?

I think it is preferable to be able to offer both options, thereby allowing clients to decide what is best for their situation, assuming that they even have enough assets to qualify for a fee-based approach.

Where exactly is the problem?

If the argument is about semantics, then I agree and the solution is to change the definition of 12(b)-1 from a distribution fee to a service fee.

However, abolishing 12(b)-1 fees is a solution looking for a problem, and in my opinion, the problems will truly begin if these fees are abolished.

At that time, many individuals will lose access to a wide array of services at a very affordable cost and will have to rely on the mutual fund companies alone — a losing proposition for everyone.

Terrence M. Downing
CFP and CPA
Terrence M. Downing CFP, CPA Financial Advisor
Williamsville, N.Y.

Advisers likely fiduciaries under state common law

Attorney Jon Drucker’s letter to the editor in the April 7 issue pointed out that fiduciary status attaches in several different ways.

Whether regulated as a broker, investment adviser or insurance agent, one such way is the application of state common law to hold financial advisers to broad fiduciary duties of due care, loyalty and utmost good faith when they enter into relationships based upon trust and confidence with their clients.

Under state common law, a variety of circumstances may indicate that a fiduciary relationship exists (with broad fiduciary duties attached to the adviser), as opposed to an arm’s-length relationship. Such indicia or evidential factors include influence, placement of trust, vulnerability or dependency, substantial disparity in knowledge, the ability to exert influence, and placement of confidence.

No contract is needed that accepts fiduciary status, and indeed, contractual terms that deny the existence of broad fiduciary duties are ineffective. This is because fiduciary status is imposed by the law and can’t be negated by the agreement between the parties.

A variety of facts might give rise to a finding of fiduciary status for a financial planner. Actually providing financial advisory services to a non-sophisticated client is a key factor, especially when such services are provided over a period of time.

However, nearly as important in some of the decisions is the use of titles such as financial planner, financial adviser, investment planner, investment counselor and estate planner which denote the existence of a relationship based upon trust and confidence. Hence, the use of titles such as financial consultant or certified financial planner are significant factors in finding a registered representative to be a fiduciary under state common law.

Should brokers think that they are immune from findings of fiduciary status, they should read the relatively recent case of Western Reserve Life Assurance Company of Ohio v. Graben, No. 2-05-328-CV (Tex. App. 6/28/2007) (Tex. App., 2007), finding that “when a person … is acting as a financial adviser, that role extends well beyond a simple arm’s-length business transaction.” As in Graben, there is no requirement that discretion (either actual or de facto) exists with respect to underlying accounts.

Over-reliance by brokers on Securities and Exchange Commission rules in this area is dangerous. The SEC sets a floor, not the ceiling, as to determining when fiduciary status results.

As a general rule, federal securities laws don’t pre-empt state common law as to when broad fiduciary standards of conduct are applicable. Moreover, since fiduciary status attaches to relationships under state common law, not to accounts, and since the application of fiduciary status results from public-policy considerations, attempts by a dual registrant to “switch hats” or “remove the fiduciary hat,” as the SEC’s proposed “special rule” of September 2007 would seem to permit, wouldn’t be effective to circumvent state common-law application of broad fiduciary duties.

It is also true, as Mr. Drucker pointed out, that all registered reps also possess limited fiduciary duties. A registered rep is always under specific fiduciary obligations as to each individual brokerage transaction.

These duties include recommending a stock only after becoming familiar with its nature, price and fundamental prognosis; carrying out the customer’s order in a manner that is the best execution for the customer; informing the customer of the risks of an investment; transaction of business only after receiving authorization; refraining from self-dealing or disclosure of personal interests; and not to misrepresent material facts. But these specific duties aren’t equivalent to the broad fiduciary duties of due care, loyalty and utmost good faith, which are applicable, under state common law, to relationships based upon trust and confidence, and which also apply under specific federal and state laws (Employee Retirement Income Security Act of 1974, Investment Advisers Act of 1940, etc.).

Ron A. Rhoades
Editor
FiduciaryNow
Lecanto, Fla.

Related Topics: Letters To The Editor