Four years ago next month, President Obama signed the Dodd-Frank Act into law. As most independent advisors are well aware, Section 913 of that law reasonably called for a fiduciary standard for brokers “that is no less stringent than for RIAs” under the ‘40 Act, and “harmonization” of the regulation of brokers and advisors. At the time, many independent RIAs (and those of us who observe them) applauded at least this section of Dodd-Frank for bringing today’s asset-managing, advice dispensing brokerage industry into the 21st Century.
Almost half a decade later, we’re still waiting, with considerable dismay. Instead of increased investor protections and a level playing field, we’ve watched:
- the SEC drag its inactive feet on implementing Dodd-Frank, year after year
- FINRA and SIFMA “embrace” fiduciary standards while continuing with business as usual
- most mindboggling of all, a whole-scale regulatory crackdown on RIAs (yes, the very people whom Dodd-Frank held out as a regulatory model for brokers), under the cover of the Bernie Madoff scandal—who, of course, was a former board chair of FINRA/NASD.
I offer this Dodd-Frank recap as a reminder of how reasonable sounding ideas can have very unintended consequences in the hands of the securities industry and its “regulators,” as the industry now attempts to turn the public’s focus away from a fiduciary standard for brokers, and toward “fee transparency.” While the notion of investors knowing exactly how much they pay for what sounds like a no-brainer, my bite marks from Dodd-Frank still haven’t healed. That makes me wonder if independent advisors might want to think through this “fee transparency” thing before they jump on that bandwagon.
“What could possibly be the downside of fee transparency?” I hear you ask. Well, for one thing, SIFMA is for it—which if nothing else, should give us all pause. As Mason Braswell reported April 10 on Investmentnews.com, John Thiel, head of Bank of America Merrill Lynch's wealth unit, told attendees at a SIFMA private-client conference in New York: “As major financial firms look to establish more trust among clients, they need to do more to be upfront with clients about the fees that they are being charged for advice and financial products. As an industry, we need to create transparency. We have got to get there in terms of transparency around fees.”
Sounds pretty good, right? Well, call me a skeptical old coot, but let’s think this through for a minute. First, what’s the biggest challenge facing Wall Street brokerages today? Lack of client trust? I doubt it: I don’t remember brokers finishing near the top of many public trust polls I’ve seen in the past 20 years. No, it’s the +10-year breakaway broker trend, with top “producers” leaving in droves to set up independent RIAs and keep 100% of the AUM fees from the wealthy clients who left with them.
Why is this important to fee transparency? For starters, is it just me, or does it seem rather coincidental that at the peak of broker diaspora to independence, major wirehouses like Merrill Lynch would suddenly see the light and start talking about coming clean with clients about the fees they are paying? Which brings us to issue number 2: What’s the real difference between a broker and an independent advisor?
To my mind, the difference is independence: brokers at wirehouses are W-2 employees of their firms. Which means their compensation comes from the firms, not the clients—creating the illusion that clients get “free” advice.
Wall Street has used this distinction for years, arguing that they serve smaller investors who couldn’t “afford” to pay independent advisors while, at the same time, having no obligation to recommend the lowest-cost investment alternatives to their poor under-served victims, I mean, clients.
And that leads us to issue number 3: What “fees” are we really talking about here? While Mr. Thiel talked about fees for “advice and financial products,” my skeptical mind will bet you dollars to donuts that when the regulators get around to writing the regs for “fee transparency,” they will only focus on how much the clients pay their “advisors.”
Which, of course, will show that clients pay independent advisors 50 bps to 150 bps per year, while brokerage clients pay their brokers nothing; that’s zero, zip, nada. Which is undoubtedly how The Wall Street Journal and Money magazine will report it and, not coincidentally, create a competitive marketing advantage not only with independents, but with the robo-advisors as well.
What’s more, should anyone actually get around to writing regs for disclosing the fees, charges, loads, expenses, etc. on brokerage products that clients buy, I’ll hazard a guess that some charges might “inadvertently” fail to fall under the written definitions of those requirements, or be buried in such impenetrable legalese that not one client in a thousand will ferret them out.
Of course, I could be completely off base here. Maybe fee transparency will finally show the real costs of brokerage “advice” vs. independent advice. But just in case, before independent advisors and the organizations that represent them go all in on fee transparency, they might do well to remember both our Dodd-Frank experience and the old business adage: Agree to anything, but have your lawyers draw up the contract.