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Improbable win for fiduciary standard: Congress set to hand SEC power to impose fiduciary duty on broker-dealers

Conference committee agrees on a measure that calls for six-month study and then gives SEC authority to write single set of rules for advisors and brokers

Author Elizabeth MacBride June 25, 2010 at 3:36 AM
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A strong advocate for the fiduciary standard, Frank pulled out a win in the conference committee this afternoon.

RIA Compliance

Stephjen Winks

Stephjen Winks

June 25, 2010 — 2:49 PM

Wonderful outcome.

The suitability standard is obsolete in advisory services. Rather than advice being incidental to trade execution in six months trade execution will be incidental to advice. If Cerulli is right that in seven years 80% of brokers will be primarily engaged in advisory services up from 20% today, this legislation reorders the entire industry around advice rather than commission sales which has been the dominant business model for centuries.

We all need to get behind Mary Shapiro, as she must fend off brokerage industry interests in the formulation of rules and regulations.

Mary Shapiro has the opportunity to make history but her hands have been tied in promulgating rules and regulations by Congress requiring the Johnson loophole absolving brokers from their ongoing fiduciary duties and responsibilities after a recommendation is made. Essentially this makes brokers not accountable for their investment recommendations. This is difficult to reconcile with the traditional understanding of fiduciary standing. If Shapiro can make this exception specifically limited to discount brokers, then it is manageable. If not, there is a generalized fiduciary lite standing for brokers which permanently place brokers at an inferior competeitve market position relative to RIAs where they are not accountable for their investment recommendations. This provides RIAs a massive competitive advantage as they are held to THE fiduciary standard of care which entails on going accountability for their investment recommendations. Importantly, comming to Shapiro’s aid, top brokers will not put up with second rate advisory services status. Either our largest firms respond to the needs of its top advisors or top advisors, whose alleigence is to their clients, will be forced to become RIAs.

Shapiro also has a challenge with proprietary products not necessarily being a conflict of interest, as it requires proprietary product manufacturers to always be the best alternative in order to be recommended at all. Of course in a competitive market place this is not possible. Thismeans that proprietary product vendors will not allow their captive sales force provide advice—limiting their role to acting in a sales capacity.

The industry as we know it is about to be reordered around advisory services in the best interest of the consumer.


Sara Hansard

Sara Hansard

June 27, 2010 — 1:19 AM

Sounds like the fiduciary side probably won out in the financial services bill, although it will depend on what the SEC comes up with. As of now, at least, I would assume the SEC would come down on the fiduciary side.

But the study is not necessarily a bad thing, notwithstanding the fact that the wording for the study is written in terms of the language that brokers have been using, and it is clearly an attempt to try to push the SEC to go against imposing a fiduciary standard on brokers.

Nevertheless, the SEC does need to look at how well investors actually do paying broker commissions versus paying fees to advisers. The problem that I think advisers are going to have is that they’re expensive. Regardless of their argument that really, in the end, investors actually pay more by going to brokers and buying worse investments, investors are simply not going to believe that when they’re quoted extremely high prices for advisory services. Moreover, advisers have been arguing for years that investors should pay more attention to mutual fund fees since paying even an extra 1% on assets adds up over time. In my 12 years of covering the advisory industry for InvestmentNews I noticed that many advisers charge 1% of assets. Further, most middle class people are not going to be able or willing to pay big hourly fees for advisers. Advisers have not been willing to deal with this issue, and I think it will eventually come back to haunt them.

Perhaps one possibility is offering investors the best deal, whether it’s by paying on commission or by paying fees based on assets.

Stephen Winks

Stephen Winks

June 28, 2010 — 4:58 AM


The double dipping and tripple (commission, advisory fee, 12(b)1, embedded product cost) dipping in compensation will be done away with by required transparency so total cost becomes an issue which will be managed by how the industry approaches portfolio construction. Call me crazy, but I believe mutual funds will be a big loser under a fiduciary standard of care because of their cost structure and inability to report holdings in real time. The industry needs to move from a product management organizational structure to a process management organizational structure. Transparency will require advisors to have good answers on why mutual; funds were used relative to better opportunities. I believe real time buy/sell manager research managed by overlay management technology which facilitates real time management and documentation of an incredible degree of portfolio detail for an unlimited number of custom client portfolios, is the future. It is client centric, not product centric, it generate necessary documentation, it supports continuous comprehensive counsel required for fiduciary standing, it is cheaper at 25bps than mutual funds at 120 bps, and eliminates redundant triplicate account administration cost at the product, client and trustee levels that adds no value.

A fiduciary standard establishes and requires accountability that the industry must effectively manage which requires a more structured approach to portfolio construction and advisory services not presently in place.


Jack Bullet

Jack Bullet

January 18, 2013 — 6:28 PM

Barney Frank should be wearing an orange jumpsuit and doing hard time for his role in the housing crisis which has nearly ruined the economy and the lives of countless Americans. It is astonishing how these radical leftists not only get away with criminal behavior, but how they continue to be given any shred of credibility by anyone.

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