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Regulatory Wire: Is it game-over for the fiduciary standard this year? Advocates say, maybe not

Johnson amendment, calling for study of harmonizing regulations, passes as part of 1,596-page bill

Author Brian O'Connell May 21, 2010 at 4:31 AM
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Looking ahead to next week: a powerful new committee will have its first meeting

Stephen Winks

Stephen Winks

May 21, 2010 — 4:21 PM


Congress only operates in a crisis mode and Congressional authorization is required for the SEC to create and enforce the fiduciary standard for both brokers and advisors. It is hard to believe we have lost an exhausting decades old consumer protection fight for all advisors to act in the best interests of the consumer. The best interests of the broker/insurance lobby have prevailed over that of the consumer and the advisor.

Congress is not persuaded that literally acting in the best interest of the consumer is good public policy, its makes no difference if three of the five SEC Commissioners clearly see fiduciary standing and protection appling equally to the counsel being provided by brokers and advisors because it is Congress’s decision, the brokerage/insurance industry still does not see the importance of having the necessary enabling resources to (a) determine whether a recommendation is in the consumer’s best interest and to (b) make it possibe to determine of whether a recommendation added value or not. The buyer beware suitability standard has prevailed when a fiduciary standard in the best interest of the consumer has been denied to the consumer. Why is the fiduciary debate over? In short, if the legislative power of Congress is now not able to discern basic public policy so obviously in the best interests of the consumer— any finding of the Johnson/Crapo study will be lost in 24 months when all sense of urgency will have passed.

In hindsight, the death knell was not realizing how important the Collins’ Amendment was in establishing bi-partisanship in the Senate. Instead, the Collins Amendment, which established fiduciary standing for brokers but exempted mutual fund and annuity sales for mass market clients from fiduciary standing, was vicously attacked—thus shutting down an all important advocate. We could have handled the mutual fund and annuity exemption as being an inferior market position for brokers, capable of being fully exploited by advisors, painting brokers into the least attractive very low end of the market. Instead, Collins was attacked rather than being treated as an ally. Advisors were out gunned, out smarted and out maneuvered.

So now we just hopefully wait for Johnson/Crapo, which assures us of nothing.

Is the fight for fiduciary standing worth while, you bet. But the advisor market can no longer just be a segment of the larger financial services industry, it must become a seperate and distinct industry and not accomodate brokerage interests that fight fiduciary standing but still want the benefit of consumer advocacy and fiduciary standing.

After two decades of an exhausting fighting, fiduciary standing has to be taken up by a younger generation as their cause as it may not happen in my lifetime.

What we have learned is we win on merit in the best interests of the consumer, but that does not count. The vested interest of FINRA, SIFMA, FSI and other brokerage insurance groups will not give up on their “buyer beware” suitability standard just as we will not give up on the fiduciary standard. The brokers at 358,000 out number advisors at 35,000, ten to one.

Having taken the debate to Congress and lost, the way advisors win is not going through the brokerage gauntlet again and expect a different result but to take the fight to the free market where the best interests of the consumer will invariably prevail. We as advisors must find a way to bring large scale institutional support for fiduciary standing within the reach of all. This is beyond the reach of the individual practioner and importantly establishes an organized response to the deeply entrenched brokerage and insurance lobby to which we are vulnerable.

If the necessary enabling resources [(a) prudent process tied to statutory documentation to assure fiduciary standing for each of the ten major market segments advisors serve, (b) technology which supports accountability and transparency necessary for continuous comprehensive counsel required for fiduciary standing, (c) a functional divisioin of labor (Advisor, CAO, CIO) which simplifies the execution of fiduciary counsel, (d) conflict of interest management (not diosclosure)], were available that safely brought the full range of advisory services (transactions, planning, consulting, fiduciary standing) within the reach of every advisor to include easy to execute fiduciary standing—the entire industry would immediately evolve toward advisory services from commission sales, without Congressional approval or brokerage/insurance industry blessing.

In a free market, the best interests of the consumer will prevail, the vision, leadership and know how is there—we just need a large number of principled advisors and the capital to force the issue of fiduciary standing into the free markets.


Elizabeth MacBride

Elizabeth MacBride

May 21, 2010 — 4:25 PM

Elizabeth’s note: Knut Rostad, chairman of the Committee for the Fiduciary Standard, sent me this note via e-mail:

The fat lady has not sung. Wall Street reform and the fiduciary issue move to the conference committee. The key question now is whether conference committee members agree with how the Senate has “picked winners and losers” as it essentially endorsed the “Goldman standard” for all clients of brokers who give investment advice

Public confidence in Congress today, by all accounts, is lower than was Richard Nixon’s public approval as he resigned from the presidency. The absence of a requirement that brokers who give investment advice be regulated like investment advisers is stupefying, but not surprising. Investors’ (voters) historically low expectations of Congress have been met.

Many members of Congress rail against heavy-handed regulation that “picks winners and losers.” Libertarians should take note. The financial reform legislation — legislation heralded as the “Biggest regulatory overhaul of Wall Street since the depression” — essentially concludes that brokers who talk like investment advisers and work like investment advisers and persuade clients to trust them like investment advisers should not, however, be required to put clients’ interests first as the law requires of investment advisers. Brokers who act like investment advisers can continue, if they wish, to not avoid conflicts, or to not disclose and manage conflicts, to not control investment expenses, and to not, of course, tell a client how much the client is actually paying the broker in compensation.

Twenty three days after Goldman Sachs explained to the entire world, in excruciating detail, that the suitability standard means its fine to conceal a huge conflict of interest from a client (because the client is very smart, and understands Goldman’s role as a market maker), the Senate effectively endorsed the “Goldman standard” for institutional clients for all retail clients of brokers. This is not the world’s greatest deliberative body’s proudest moment.

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