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Why exactly DOL's latest action is so shocking to so many brokers -- and even ERISA lawyers -- despite years of warnings

Brokers managing IRA assets never imagined they'd need to make a written promise to do right by investors

Author Lisa Shidler April 20, 2015 at 5:42 PM
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Marcia Wagner: I don't want obnoxious crap like that in my contract.

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Stephen Winks

Stephen Winks

April 20, 2015 — 9:44 PM

The shock and awe in the responses to the DOL proposal establishes how ill prepared the industry is in supporting advisory services which requires fiduciary duty for professional standing.

There is nothing new for those concerned with professional standing and consumer trust, as fiduciary duties have been long established (for centuries). What is new is the brokerage industry has to abide by the best interest of the investing public when it comes to 401(k) plans and IRAs which by any definition are “retirement assets” and in the DOL’s regulatory jurisdiction. The DOL proposal simply requires the advisor who renders advice to fulfill their on-going fiduciary duties, which is not necessary under the broker suitability standard. Brokers are not accountable for their recommendations. it is up to the consumer to determine investment merit on their own under a suitability standard (regardless how limited the investors investment knowledge and experience may be), as the brokers simply makes the client aware of their investment alternatives. The broker has no ongoing responsibilities to act in the consumer’s best interest once an investment is made. I am curious why this is a new idea for some which belies the brokerage lobby arguement. Advisors are accountable for their recommendations and have significant ongoing fiduciary duties to act in the best interest of the investing public. The DOL affirms long standing statutory duties for those rendering advice on retirement assets as required by statute for those investing on behalf of others.

The elephant in the room is, shouldn’t the broker always act in the best interest of the investing public on all accounts including “retail investors” held captive under the broker suitability standard? An indisputable case has been made that the brokerage lobby has long denied the retail investor” (who needs the most help) the same consumer protections accorded all other investors.

The two principle areas brokerage industry advocates lament in response to the DOL proposal are (1) compensation and (2) the adjudication of client disputes.
1. Compensation: As much as 40% of the earnings on retirement assets is lost to Wall Street management fees, commissions, administrative cost. The DOL proposal charges advisors to manage account expenses as a cost center rather than a profit center in the best interest of the investing public. This, fundamental fiduciary duty engendering trust in advisors rendering personalized advice is not a consideration for brokers under the present suitability standard. The brokerage lobby’s suitability standard for this and many other reasons has lost the trust and confidence of the investing public. Can consumers rely upon the advice rendered by brokers and their firms under a suitability standard?
2. Adjudication of Client Disputes: The FINRA Arbitration procedure protects the brokerage industry interests not that of the consumer. By the industry maintaining that brokers do not render advice, it avoids ongoing fiduciary duty of the broker and fiduciary liability. This position has crippled the broker’s ability to act on the best interest of the investing public, thwarting broker access to technological innovation that is transforming the advisory industry in the best interest of the investing public. The brokerage lobby position is counter to modernity. Legitimate consumer complaints presuming their interests are being served are routinely dismissed in arbitration as the broker has no ongoing responsibility to act in the consumer’s best interest. The brokerage industry’s self-interest is self-defeating as it comes at the expense of the best interest of the investing public.

The false narrative and well-crafted legal defense of the brokerage lobby now must withstand the sunshine required for public trust and the courage of regulators who are charged with protecting public trust.

Stephen Winks

David Maurice

David Maurice

April 28, 2015 — 10:24 PM

Thanks, Stephen. You’ve done it again. As I’ve read through the barrage of reaction, analysis and so-called observations on the proposed rule, I am amazed how filtered through bias and just plain ignorance of the issues that are being reflected by folks who’ve been so insulated from others’ perspectives and experience.

It all comes down to language again from my standpoint. The brokerage industry wants to be and has been allowed to call themselves 'financial advisors’ without ever accepting the inescapable implications to investor/consumers for that word. There is no way in language or logic to escape the implication and inherent connection with what the legal term 'fiduciary’ means from the vernacular term 'advisor’. No other industry allows its sales force to refer to themselves as 'advisors’ and there is a reason for it. It’s just that simple – and the only reason it hasn’t been that simple is the long and complicated history of the industry running from the obvious – which has done nothing for investor/consumers but add further layers of confusion in so called disclosures. Consumer/investors should not be required to go through the kind of mental gymnastics to understand the nature of the relationship they are receiving guidance/advice for on such a significant area of life decisions.

Want to help investor/consumers and arguably the most important element of that group – retirement savers? Easy. Let brokers continue to call themselves 'advisors’ and make them become that with the entire re-making of the industry business model or give up the marketing of that term and the obligations that come with calling your sales force 'advisors’. I personally do not see the brokerage industry remaking itself into an advisory model in my lifetime which I know Stephen disagrees with. But that’s what it will take to reconcile the language issue – which is where the mind of the consumer/investor must be addressed. Too bad the term was ever allowed to be used in the brokerage industry. Still stymies me how that ever happened. But that was before my time.

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