Okay, so the FPA’s lawsuit against the SEC was a win/win from the start. But it wasn’t just a win/win, it was a WIN/win, and FPA WON. Can you believe it? The Financial Planning Association took on the army of lawyers that is the SEC. It convinced a United States Court of Appeals that the Commission overstepped its authority when it expanded the Investment Advisers Act of 1940 to allow brokers to continue to masquerade as financial advisors even when they are charging fees for advice.
Had the FPA lost, it still would have “won” in the sense that it would have generated substantial publicity for the fact that stockbrokers are exempt from the duties and responsibilities of advisors, even when they are posing as advisors. This may seem obvious to you and me, but as far as I can tell, there isn’t one financial consumer in 1,000 who understands this fact.
But, surprise, surprise, the FPA went and won the darned thing. In addition to the immediate result of reestablishing that brokers who charge a fee for advice have a fiduciary duty to their clients, the FPA’s victory could have far-reaching consequences for the financial services industry and the role that financial planners play in it. Of course, that largely depends on how the FPA and others in the advisory community play their newly dealt trump card: call me skeptical, but that’s not necessarily cause for unbridled optimism.
Even better than the ruling itself, the Court’s reasoning was remarkably clear: The ’40 Act exempted stock brokers from the fiduciary duty imposed on investment advisors as long as the advice they offered was incidental to their job of selling securities–provided they didn’t receive any compensation for that advice. The SEC tried to argue that fee-based services such as wrap accounts and other management of assets still fell under the broker exemption from the duties and responsibilities as advisors. The Court found the opposite: that fee-compensated management services were exactly what Congress intended to regulate under the Act. Consequently, brokers all over the country who continue to charge clients a fee for managing their assets have suddenly become investment advisors, with all the disclosure, reporting, recordkeeping, and fiduciary duties that entails.
Fiduciary Duty Essential
One of the farther-reaching consequences of the decision could be a greater understanding of what the financial services industry is all about, and therefore, why a fiduciary duty is essential to the delivery of objective advice. At least, that is, for anyone who takes the time to actually read the Court’s ruling.
In the majority opinion, Circuit Judge Judith Rogers wrote at length about why Congress deemed it necessary to pass the ’40 Act, and by applying that same reasoning to the SEC’s “Merrill Lynch Rule,” implied that the situation still exists today. “The essential purpose of [the IAA] … [was] to protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts,” the Judge wrote, “and to safeguard the honest investment adviser against the stigma of the activities of these individuals by making fraudulent practices by investment advisers unlawful.”
In her majority opinion, Rogers explored the record on why the Act was written in the first place: “Investment advisers could not completely perform their basic function–furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments–unless all conflicts of interest between the investment counsel and the client were removed.” Pretty strong stuff, considering we’re still debating the necessity of a fiduciary duty today.
So who’s going to take the time to read all this? It’s probably not fair to ask, nor likely, that more than a nerdy handful of the public will even glance at the Court’s opinion. But I’d like to think my colleagues in the consumer financial press will spend some time perusing a ruling of this import, and come away with a much clearer understanding of the differences between financial salespeople and genuine advisors, and why that’s essential to folks who need reliable advice. But alas, my experience with the financial fourth estate suggests that their workload doesn’t always permit attending to such nitty-gritty details, especially when it takes time away from the coin-flipping necessary to determine which seven mutual funds to Buy Now!
Make the Most of It, FPA