The Kentucky professor schools the Washington lobbyist on the looming threat of broker-dealers forcing reps to sacrifice their CFP designations -- and questions Hammerman's math on 'one million employees' he claims to speak on 'behalf' of

June 20, 2019 — 6:37 PM by Guest Columnist Ron A. Rhoades

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While I appreciate SIFMA’s engagement and reply to my prior article, which I fully stand behind, the major issues I raised therein were not addressed head-on by the Securities Industry and Financial Markets Association. 

It is undeniable that some broker-dealer firms have engaged in heavy-handed tactics by threatening to not do business in two states (Nevada, New Jersey) that have proposed to adopt a bona fide fiduciary standard for brokers.

It is undeniable that some broker-dealer firms have threatened the Certified Financial Planner Board of Standards, Inc. These broker-dealer firms threaten that they will force their representatives to drop the CFP certification if the CFP Board proceeds to implement its new fiduciary standard on October 1, 2019.

As I stated in my article, such actions by broker-dealer firms may well amount to an unlawful “group boycott,” and may constitute either a restraint of trade, or unfair trade practice, or both, under established statutory and case law.

But a debate within the pages of RIABiz will not settle this issue. I can only hope that aggrieved parties (the citizens of Nevada and New Jersey, and Certified Financial Planners everywhere) will pursue complaints against these heavy-handed practices with the appropriate regulatory bodies in their states. I can only hope that the Federal Trade Commission (FTC), or similar state regulators, will fully investigate these matters and then undertake such remedial actions as may be appropriate.

Overlooked: Implications for CFPs

As a result of the S.E.C.’s recent evisceration of the fiduciary standard found in the Investment Advisers Act, the CFP Board is leading the profession in requiring, in its new Code of Ethics and Standards of Conduct, adherence to a true duty of loyalty in which conflicts of interest must not only be disclosed but also be properly managed.

What truly matters to personal financial advisers are the implications of threats, by major broker-dealer firms, to force their registered representatives to drop their CFP certifications. Will these registered representatives be forced to give up a valuable certification – increasingly recognized (and asked for) by the consuming public – for which the certificants studied for months and months to obtain?

Will registered representatives be required by their broker-dealer firms to abandon a competitive advantage that has been shown to lead to higher incomes? Will the competitive advantage enjoyed by these CFPs – which will be further enhanced after October 1st by consumer media will play in pointing to CFPs as “true fiduciaries” -  be truncated? How would a registered representative, forced to give up her or his certification – explain to her or his clients why she or he can no longer abide by the CFP Board’s high standards of conduct?

I would hope that CFP certificants, in light of the threats made by some broker-dealer firms, are proactive in questioning their own firms. If their firm is unable to confirm to them (preferably in writing) that the certificant will be permitted to retain the CFP certification come October 1, 2019, then such certificant should carefully consider career alternatives.

The CFP certification – and acting under high standards of conduct required under the CFP Board’s new Code of Ethics and Standards of Conduct – is the future. See: Kitces: Will the CFP Become Mandatory? Those who already possess, or aspire to obtain, the Certified Financial Planner certification should not be denied by actions of their own broker-dealer firm.

Overlooked: Demise of the brokerage industry

Are brokers increasingly tired of the heavy-handed tactics that some of their firms, and trade associations, utilize as they consistently oppose a true fiduciary standard of conduct?

In my experience, most individual brokers desire to hold themselves to high standards. The vast majority of my colleagues who work within broker-dealer firms desire to serve their clients with both a high degree of expertise and by keeping the interests of their clients paramount.

But the structure that registered representatives work within is often opposite to the financial adviser’s desires to serve their clients properly. Brokerage firms have devised many often-hidden ways to derive revenue from their customers’ holdings – such as via payment for shelf space arrangements, payment for order flow, soft dollar compensation, securities lending revenue, and more.

A core conflict of interest exists with brokerage commissions, especially when they are not levelized. Even then, commission-based compensation often becomes problematic due to the necessity of portfolio rebalancing in client accounts, in adherence to Modern Portfolio Theory. Additionally, 12b-1 fees, which I view as “advisory fees in drag,” could well be challenged in future years on several different grounds, and should never form the basis of a registered representative’s business plan.

More and more registered representatives are leaving broker-dealer environments in which they are pressured to sell proprietary products or “favored” products that pay their firm more. More brokers are aware that independent registered investment advisory firms offer the opportunity for the individual financial advisor to truly be on the same side of the table as the client, and in so doing pursue a rewarding career in which it is a pleasure – each and every day – to go to work and to serve the client.

Brokers left to regulate?

At a recent forum hosted by the Financial Planning Association, S.E.C. Commissioner Hester Pierce observed that there existed an increasing exodus of registered representatives from brokerage firms. She wondered aloud if there would even be any brokers left to regulate – a decade from now.

The conflict-ridden product sales business model of the broker-dealer industry is a dinosaur, and it is far past time for the next extinction event to occur. As SIFMA, FSI and many of the major brokerage firms continue to oppose bona fide fiduciary standards of conduct, and as consumers increasingly ask for “CFPs” who are “fiduciaries” to serve their interests, BD firms and their lobbying organizations increasingly risk becoming irrelevant.

I doubt that most of the “the industry’s nearly 1 million employees” of which SIFMA states that it acts “on behalf” would agree with the propriety of using threats of group boycotts. It is one thing to lobby and inform. It is quite another to orchestrate group boycotts, which are an anti-competitive practice. Broker-dealers needs to understand this important distinction.

Whether group boycotts in this instance are illegal is a matter for adjudication. Regardless, there is no question that conspiring to engage in a group boycott is a heavy-handed tactic, wrongful in the eyes of many.

By their use of such heavy-handed tactics, broker-dealer firms engage in reprehensible conduct that – in the end – will only accelerate their own demise. I urge registered representatives to consider whether they desire to be associated with such tactics, and whether their own careers would be better served by joining the many tens of thousands of financial advisors that have already departed the antiquated broker-dealer business model.


Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University. This article reflects his own views, and are not those of his employer nor any firm, organization, institution, or cult to which he now or has ever belonged or been kicked out of.




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