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Industry Spotlight > Broker Dealers

Clark at Large: Hope and Change

By Bob Clark, Bob Clark

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I know this is risky, but it’s all a part of the high-wire timing act we call financial journalism, especially the monthly print variety: It looks like that by the time this hits your desk, Congress will still be debating the final version of “The Consumer Protection Act of 2010,” or CPA. As you may have heard, the CPA will include the reregulation of brokers and other financial advisors. Hopefully, that makes this a good time to recap events leading up to this point, so you won’t be surprised by the final outcome, and you’ll have some idea how in the world we got there–and what happened to that level fiduciary playing field that independent advisors have been dreaming about since the 1980s. The fiduciary standard’s not dead yet, but for those who are hoping for change, it may be time to start petitioning for divine intervention.

Last Year’s News

You may remember that last June, the Obama Administration proposed reforming America’s financial system in an 85-page white paper. The Treasury Department recommended (along with many, many other reforms) that: “The SEC should be given new tools to increase fairness for investors by establishing a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisors and broker-dealers.” Thus began the biggest debate over financial advisor regulation since the market crash of 1929 led to the Investment Advisor Act of 1940.

This time, in an effort to avoid another 11-year delay in reform, Congress responded with what for it was lighting speed, and in December of 2009 the House of Representatives passed the “Consumer Protection Act of 2009″–and the buck–over to the Senate. Of particular interest to financial advisors, the House’s Act contained the “Investor Protection Act of 2009″ which calls for the SEC to create rules for when brokers would have a fiduciary duty to their clients.

The securities industry–in the form of SIFMA and FINRA–quickly grasped the negative political implications of opposing a fiduciary duty for brokers. Instead, they launched a brilliant campaign, which on the one hand extolled the virtues of the fiduciary standard, while at the same time pointing out that the realities of the “real world” required the careful practical application of fiduciary standards to only the appropriate parts of any broker/client relationship.

Reading between the lines and the lines themselves of SIFMA’s position revealed a fiduciary standard so watered down as to enable brokerage firms essentially to continue doing business as usual.

To many observers, including this one, the prospect of turning over the creation of a fiduciary standard for brokers to the SEC, which is currently run by former FINRA CEO Mary Schapiro, was not a happy one. After all, it was the SEC that ruled (and then lost in court to the FPA) that the clause in the ’40 Investment Advisers Act which currently exempts brokers from having a fiduciary duty to their clients when selling securities should be extended to apply when brokers manage client portfolios. Not exactly the folks you want standing up to Wall Street over clients’ best interests.

This Year’s News

Skeptical about the prospects of the House bill, independent advisors, consumer advocates, and other proponents of broadening the fiduciary standard turned their hopes toward the Senate: On a bill proposed by Senator Christopher Dodd (D-Connecticut), the now lame-duck chairman of the Senate Banking Committee. Dodd’s “Restoring American Financial Stability Act” offered a far more direct solution to the fiduciary challenge set out by the Obama white paper: Simply eliminate the “broker exemption” to the ’40 Act. That way, brokers would fall under the same rules–including a fiduciary standard–as everyone else in America who offers investment advice, whether incidental to the sale of securities or not.

But despite intense–and at times, even heroic–efforts by consumer groups, industry associations such as the Investment Adviser Association (IAA), and especially by the Committee for the Fiduciary Standard, led by Knut Rostad, Roger Gibson, Harold Evensky, and Wealth Manager’s Kate McBride, the financial services industry prevailed. At the behest of the insurance lobby, Senator Tim Johnson (D-South Dakota), a member of the Banking Committee, introduced an amendment to Dodd’s bill that referred its fiduciary provision to the SEC for an “18-month study of the brokerage and investment advisory industries.” Goodbye, simple fiduciary standard.

Where was the financial planning “profession” while the fight for a genuine fiduciary standard for all financial advisors was being fought and probably lost? The Financial Planning Coalition, led by the CFP Board, including the FPA and NAPFA, was pursuing its own agenda. While giving lip service to supporting a fiduciary standard (at times the “40 Act standard,” other times the “40 Act” without the broker exemption, and still others an undefined “fiduciary duty”), the Coalition used what little influence it has with legislators, regulators, and fiduciary advocacy groups to promote its plan to get federal regulation of financial planners.

An Answer to a Question No One Asked

At best, presenting a mixed message about its agenda, and at worst, offering a solution to a question no one in Washington was asking, the Coalition became so marginalized that its impact on the fiduciary debate was reduced to insignificance. It’s efforts on the Board’s behalf culminated in Senator Herbert Kohl (D-Wisconsin), also on the Banking Committee, introducing the Coalition-written Financial Planner Act of 2010, as an amendment to Dodd’s bill. The highlights of the FP Act included creating “Registered Financial Planners” with standards below those of existing CFPs, an undefined “fiduciary duty,” and a definition of “a financial planner” as: “an individual who–provides, or offers to provide, directly to individuals advice with respect to the management of financial assets in not fewer than two areas of financial planning, including–(I) investment planning; (II) income tax planning; (III) education planning; (IV) retirement planning; (V) estate planning; (VI) risk management.”

Seems like a lot of advisors might fall under this definition, to be regulated by a body sanctioned by the SEC. A skeptical observer might see the CFP Board itself angling for that role. CFP Lite, anyone? How the Board got the FPA, and especially NAPFA, to go along with this, I can’t even venture to guess. One insider suggested to me it was the Board’s call for a unified front against the specter of FINRA becoming the single regulator of financial planning. As the vast majority of CFPs are currently regulated by FINRA, that seems to me to be a pretty lame argument, but perhaps NAPFA and the FPA fell for it.

The Coalition’s Financial Planning Act, it seems, was treated with the reception it so richly deserved: A source close to the SEC told me that upon hearing about the Act, the SEC’s Mary Schapiro remarked: “What are they thinking?” The Kohl Amendment was never acted upon by the Banking Committee, instead being promptly referred out to the Government Accountability Office for “further study.” Thus, presented with the best chance in 70 years to level the advisory playing field, the collective financial planning industry frittered away what little influence it had.

Fiduciary Redux

So where does this leave the case for a real fiduciary standard for all financial advisors? Right back where we started: With the Investor Protection Act, as passed by the House. The next step is for the Senate to pass Dodd’s bill in some version, and then for a joint House/Senate committee to reconcile both bills into one Act that both houses can agree on. Whether the House’s version of a fiduciary standard will escape the graveyard of “referred out for further study” is anybody’s guess.

If the Investor Protection Act does survive in its present form, here’s what we’d get:

o The SEC “shall promulgate rules to provide that, with respect to a broker or dealer, when providing personalized investment advice about securities to a retail customer… …the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment adviser under section 211 of the Investment Advisers Act of 1940.” [A fiduciary duty sans the "broker exemption."]

o “Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.”

o “The sale of only proprietary or other limited range of products by a broker or dealer shall not, in and of itself, be considered a violation of the [fiduciary] standard set forth in paragraph (1).”

For those of us who have a dream that someday everyone who offers financial advice will have a fiduciary duty to put their clients’ interests first, this isn’t exactly the Holy Grail: A fiduciary duty that ends with advice but okays proprietary products isn’t exactly “client-oriented.” And even it’s passage is far from certain. Yet, people who would know say that perhaps things aren’t as bad as they look. SEC watchers are cautiously optimistic about what Chairperson Schapiro and the other commissioners will do, should the fiduciary ball land in their court. Despite her securities industry background, many observers feel that Mary Schapiro is far more supportive of a true, consumer-oriented fiduciary duty for brokers, than she lets on in public.

I hope they’re right. And I hope the Committee for the Fiduciary Standard, David Tittsworth’s Investment Adviser Association, Barbara Roper of the Consumer Federation of America, and others prevail in keeping intact the House’s version of a fiduciary standard, so Ms. Schapiro will have a chance to step up. And speaking of stepping up, I even hope the Financial Planning Coalition will lick its wounds, get back in the game in the 9th inning, and actually do something meaningful in support of a new fiduciary standard. Hmmm: Maybe there is something to this “hope” thing.

Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].

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