Advisory Industry: SIFMA Fiduciary Study Raises Lots of Questions

Study's conclusion that retail investors would be harmed under a uniform fiduciary standard for brokers and advisors is under fire

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The advisory industry is taking issue with a new study commissioned by the Securities Industry and Financial Markets Association (SIFMA) that says retail investors will be harmed if the uniform fiduciary standard that the Securities and Exchange Commission (SEC) is currently creating does not recognize different business models.

According to the SIFMA study, which was conducted by consulting firm Oliver Wyman, retail investors would experience “reduced product and service availability and higher costs” under a uniform standard of care for investment advisors and broker-dealers “that does not appropriately recognize the important distinctions among business models.” In addition to the study, SIFMA recently submitted comments to the SEC urging the Commission to focus on three core areas addressed in the study—client choice, product access, affordability of advisory service--when conducting the fiduciary study and as the SEC moves on to rulemaking.

Should the SEC adopt the Investment Advisers Act of 1940 fiduciary standard for all brokerage activity, the report states, retail investors are likely to see “a negative impact on choice of advisory model, product access, and affordability of investment and advisory services.”

SIFMA says that Oliver Wyman collected data from a broad cross section of retail brokerage firms that serve 38.2 million households and manage $6.8 trillion in client assets. The survey covered approximately 33% of households and 25% of retail financial assets in the U.S., based on estimates from the Federal Reserve Survey of Consumer Finances.

Kristina Fausti, director of legal and regulatory affairs for Fiduciary360, says the SIFMA study is “perplexing” because “it seems to imply (if not outright state) that regulators have the option now of moving forward with a wholesale adoption of the Advisers Act requirements for brokers that would include the fiduciary standard of care, fee-only compensation, prior consent of principal trades, and a ban on proprietary product sales.”

Most observers believe, she continues, “that the SEC will narrowly construe its rulemaking authority under the Dodd-Frank Act and act accordingly, meaning the agency will only extend the fiduciary standard of care to brokers and it will take into consideration unique aspects of broker’s business, including commission-based compensation, principal trading, and sales of proprietary products.”

David Tittsworth (left), executive director of the Investment Adviser Association (IAA) in Washington, adds that all of the data presented in the report “comes from SIFMA firms--not from an objective survey of investors or other unbiased source.” The IAA, Tittsworth says, “has never suggested that ‘all brokerage activity’ should be subject to the Advisers Act. Instead, we believe the law should treat brokers who provide investment advice the same way as investment advisers. In fact, these questions affect only a small percentage of brokerage activity.”

The report, Tittsworth adds, “seems to ignore the plain language that SIFMA lobbied to include in Section 913 of the Dodd-Frank Act,

stating that receipt of commissions will not violate the Advisers Act fiduciary duty. Instead, it tries to paint a picture that the Dodd-Frank law somehow precludes a commission-based activity.”

The report also concludes that investors “prefer” commission-based accounts. The study states that 95% of households polled with investment accounts hold commission-based brokerage accounts today. A fee-based advisory platform, the study says, “is far less popular” with approximately 5% of households choosing this model. But Tittsworth points out what the Rand study revealed: investors don’t understand the difference between brokers and advisors, so “how can SIFMA conclude that the use of commission-based accounts represents a ‘preference’?”

Don Trone (left), CEO of Strategic Ethos, agrees that it “appears from the way the study was conducted that [SIFMA] surveyed households with brokerage accounts, as opposed to a survey of random households.” Households with existing brokerage accounts, he continues, “already have demonstrated a propensity to buy and sell traditional brokerage products.”

The report also states that the preference for commission-based brokerage accounts "is evident across all wealth segments, but strongest for smaller investors with less than $250,000 in assets."

Trone opines that "accounts greater than $250,000 will probably fair better" under an asset-based fee arrangement. "It's not that you couldn't apply a fiduciary process to accounts of less than $250,000, but your universe of products would be limited, and you would have to have excellent back office and/or custodial services to streamline the process."

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