Soon after the battle of Gettysburg, President Abraham Lincoln wrote to the commander of the victorious Union Army, George Meade, inquiring whether he was able to destroy Southern General Robert E. Lee’s army. Meade wrote back that he had not been able to do so, but he reported that he had successfully “driven the rebels from our soil.” Lincoln lamented to one of his secretaries: “When will my generals learn that it is all our soil!” That’s how I’m feeling today about the fiduciary issue.
In the September 2009 Investment Advisor cover story, the fiduciary issue came up in my interview with the four executives who run the winning 2009 Broker/Dealers of the Year. It was a thoughtful discussion that began with a treatment of the responsibility to the client, but also explored how having a fiduciary standard would change the responsibility of their reps. David Stringer of Prospera Financial pointed out that a fiduciary standard carries with it an ongoing standard of care. So, he wondered, if a rep determines that a specific product or investment is appropriate for a client to buy, wouldn’t the rep also be required under that standard to recommend when it was time to sell that product or investment? Jerry Rydell of Sigma noted that “in arbitration we’re held as a fiduciary no matter what,” and Ralph DeVito of The Investment Center quickly agreed that “we get held to a fiduciary standard all the time.”
Brian Murphy of Woodbury Financial first made sure to mention that he considered adoption of a fiduciary standard of only secondary importance at the moment, along with the resumption of the 12b-1 debate. (What worries him most, Murphy said, was the Administration’s moves toward redefining the legal definition of an independent contractor.) But Murphy then put the fiduciary debate into context. “I have a lot of fear that our internal posturing will not be well understood,” and that “our stewardship could be better.” The fiduciary issue, he said, “is being looked at as some sort of pill that will cure all the ills, and I’m not sure the disease is fiduciary versus suitability; I think it’s a symptom.” It’s in “practice rather than principle” where the fiduciary standard matters, Murphy argued.
The CEO of another broker/dealer told me of his concern that the issue is being presented as another skirmish between fee-only advisors and commission people. This executive noted that the U.K.’s SEC equivalent, the Financial Services Authority, recently proposed to ban commissions altogether, and pointed out that President Obama and his staff is heavily influenced by the Brits when it comes to reform.
Here is the FSA’s language on the matter: “The proposals bring to an end the current, commission-based system of adviser remuneration: we propose to ban product providers from offering amounts of commission to secure sales from adviser firms and, in turn, to ban adviser firms from recommending products that automatically pay commission.”
Could it happen here? And maybe this is the time for both sides to meet in the middle. After all, it’s the clients that are most important, right? It is all our soil, isn’t it?