More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
Skip Schweiss knows advisors. Skip Schweiss knows retirement. Skip Schweiss knows Washington. Skip Schweiss knows fiduciary. He also has a long title that reflects that knowledge — president, TD Ameritrade Trust Co., and managing director, advisor advocacy and industry affairs at TD Ameritrade Institutional — along with deep experience and insights on all those topics.
So we asked him whether this could be a pivotal year for rulemaking on the fiduciary standard and redefinition at the Securities and Exchange Commission and the Department of Labor. “I could spend an hour answering that question,” he said. When he gets “questions on the fiduciary standard from advisors, I say it’s like the duck going across the pond: On the surface, nothing seems to be going on, but underneath there’s a lot of action, though right now there’s no movement.”
While he agrees it could be a pivotal year, his caveat is that “it’s a midterm election year, so politicians won’t be doing anything.” Since “Congress by law has to approve an SRO for an industry, you won’t see that this year” either (sorry, FINRA).
What about more SEC funding, which the commission says it needs to do a better job of examining RIAs? “Every year, Obama asks for a 25% budget increase” for the commission, but “they don’t get it.” That’s because the budget dollars come out of the House Financial Services Committee, and “the Republicans won’t give the SEC a 25% budget increase.”
And the SEC? “Mary Jo White hears [about fiduciary] everywhere she goes, but she’s got a lot on her plate” that has a higher priority, such as the high-frequency trading issue. That form of trading has become an even hotter topic in Washington and on Wall Street since author Michael Lewis’ recent claim that the “stock market is rigged” in favor of those traders.
At the time of our interview in April, Schweiss mentioned that White had said only two weeks prior that “she’s directing her staff to determine whether to move ahead with a rulemaking,” a “threshold decision.” The battle over imposing a fiduciary duty on stockbrokers when giving advice “has been fought for a decade,” Schweiss said, and the Dodd-Frank Act “has come up to its fourth birthday.” So will the commission proceed with that threshold decision? Schweiss suspects “we’ll get that decision this year. She could say, ‘We won’t proceed,’ or she could say, ‘We’ll do it next year.’”
The Department of Labor, he pointed out, “has a simpler mission—to protect retirement plan participants and workers”—than the SEC’s three-part mission, which too often “can conflict with one another.” While the DOL said its fiduciary redefinition will come out in August, Schweiss said, “I’ll bet you it doesn’t happen then, and not before the election, but maybe shortly after the election.”
When asked about the claim presented by broker-dealers that a change in the DOL fiduciary rule might lead them to get out of the retirement advice business, Schweiss was incredulous. “When the brokerage industry says ‘If this passes, we’ll back away from the retirement market and the IRA market,’ well, there’s $7 trillion” in retirement plans and IRAs, “much of which is in brokers’ hands. If they’re sincere, what a seismic shift” it would be, he said. Addressing the expressed fear of the broker-dealer community that any redefinition would outlaw commissions, he responded that the DOL’s Assistant Secretary for the Employee Benefits Security Administration, Phyllis Borzi, “has consistently said, ‘We’re not taking away commissions.’”
There’s a good reason to focus on what may be coming out of Washington. Schweiss mentioned that in TD Ameritrade’s annual sentiment survey of its advisors, “for four years in a row” regulation has been their biggest worry. For RIAs, Schweiss said, that translates into advisors wondering “will FINRA be our regulator?” Advisors would much rather have a principles-based approach to regulation, like the SEC, rather than a rules-based approach, like FINRA, Schweiss reported.
What Advisors Should Worry About
Maybe advisors should be more concerned about what Schweiss called “a really big threat: the rise of the online advice providers,” also known as “robo-advisors,” which came up unbidden in multiple conversations with this year’s IA 25 honorees.
Schweiss said, “I’ve been in this industry serving advisors since 1989, and for as long as I have been doing this, advisors have told me ‘We can’t serve middle America.’”
Instead, those lower-net-worth people are “served by the IBD rep or by the insurance broker or a mutual fund company. Now we’re getting an answer to that need” with robo-advisors. “Capitalism will always fill a need,” and the online advice providers are backed by venture capital, Schweiss pointed out. “Advisors tell me that they don’t see online advice providers as a threat, but they should think hard about it.” After all, he asked, “at what point did Barnes & Noble not see Amazon as a threat?” Yes, he admits that “Turbo Tax didn’t eliminate accountants, and WebMD didn’t kill doctors,” but Schweiss thinks it’s a serious threat, and then he told a story.
“We had a meeting with our advisor council recently, and we brought in the founder of an online advice provider who did a demo.” This provider, Schweiss said, can “manage money using index funds and ETFs for $10 a month.” As the demo progressed, one of the advisors on the council—and remember, these tend to be the most successful, biggest RIA firms—reacted visibly to what this service could provide: “His eyes were as big as saucers and his jaw dropped.”
“So are your client’s children going to hire you, or will they hire Mint or Betterment?” Schweiss asked rhetorically. Since “younger generations live online, if your value proposition is asset management, watch out. If you’re a wealth manager or financial planner, you may be in better shape.” However, since “opportunity and threat are often two sides of the same coin,” he believes that “a very small sliver of advisors” will use their strategic thinking to ask, “Maybe I should partner with these online providers?” What if doing so allowed an advisor to provide a service to the children of current clients who have, say, only $10,000 to invest and “get them turned on to a relationship with the advisor?”
Schweiss isn’t just pondering this notion, he’s getting directly involved to see how well these online advice providers work. “I put one of my accounts” into the online firm that appeared before the TDAI advisors council, he said. “It took me 10 minutes.”
(Check out Investment Advisor's full IA 25 for 2014 list on ThinkAdvisor.)