In response to my March 1 blog, Joe Lyons gets it almost right, when he writes: “Making brokers adhere to a fiduciary standard is akin to making a GM car salesperson disclose to a buyer that the Toyota guy down the street has a better car at a cheaper price. The only disclosure that should be required is; ‘I am not a fiduciary, and have no obligation to act in your best interest.’ An RIA rep would claim that he/she is a fiduciary. Then let the client decide whom to deal with.”
While they both got huge government bailouts, the difference between the auto industry and the financial services industry is that car salesmen don’t hold themselves out as auto advisors, car consultants, or purchasing planners: From the nature of the relationship from the beginning, it’s pretty clear whom the car salesperson is working for—and it ain’t the car buyer. So people looking to buy a new car understand that unless they are, like Toby Keith, just a “Ford Man,” they probably want to visit other car dealers to see what other automakers are offering. When we’re going to buy a car, few of us don’t get the whole caveat emptor thing.
But financial services is different—mostly because the Wall Street brokerage firms have spent billions for as long as I can remember to convince the public that their brokers are, in fact, trusted advisors. That’s one aspect of the fiduciary debate that’s gets swept under the rug, even by seemingly objective sources such as the Rand folks who conducted the SEC survey: It’s no accident that consumers are confused about the duties of brokers. So when SIFMA and the FSI and NAIFA all argue that a fiduciary standard for brokers will hurt their business, what they are really saying between the lines is that if retail customers knew that brokers were really sales people, they wouldn’t buy nearly as much financial product from them.
What the current fiduciary debate is really about is putting an end to the practice of allowing brokerage firms and their brokers to pretend they are advisors when they are acting as salespeople. It’s not about forcing a fiduciary standard on brokers, it’s about forcing brokers to decide if they really are brokers (working for their firm) or if they are genuine advisors working for their clients. Not some of the time, or part time, but always one or the other.
As Mr. Lyons points out, this would require not only a choice of profession, but the disclosure of that choice. And I’d take that disclosure a bit further than he does: I don’t think simply telling consumers you’re not a fiduciary is enough, because I’ll bet most of them still don’t understand all the implications of that statement. I’d like to see something like: “I am a broker, employed by this brokerage firm, working on its behalf and am under no obligation to make recommendations that are necessarily in your best interest.” To which the brokerage industry resoundingly replies in one or another: ‘But we’d never sell anything that way!’ Which is really the point, isn’t it?