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Fiduciary Standard Absent from Senate Reform Bill

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Why? Because it’s worth it to B/Ds, and insurance companies that sell annuities to keep the “status quo.”

No one can say what the final bill will contain after the Senate and House meet in committee to iron out differences between the two versions of financial reforms. It may be that the requirement for the fiduciary standard will win out.

But as investors hear about this ‘study” and begin to understand the differences between the “suitability standard” and the “fiduciary standard” the choice will become clear, and fast. After all, who would you want to get your investment advice from–the one who puts your interests first, or the one who puts their own interests first?

Of course, we understand that not all brokers are out to do poorly by their customers. In fact, most brokers want to put customers first, even if their firms require them to put the firm’s interests first. Until the financial-industrial complex decides to provide the legal structure and statutes and rewards for brokers to do so, this conflict will remain, brokers and insurers will not regain the public’s trust and they will continue to see investors walk away. Caveat emptor to the buyers of B/D and insurers’ stocks.

The Committee for the Fiduciary Standard performed–at the request of Sen. Tim Johnson, (D-South Dakota), the study’s sponsor–an analysis of the questions in the study. The Committee’s conclusion was clear: a study of whether brokers should put investors’ interests first is not needed. The answers are well known and have been for more than a decade. This editor is a member of The Committee for the Fiduciary Standard.

Let’s put the suitability standard versus fiduciary standard in concrete terms, as Tara Siegel Bernard did in her article, “Trusted Advisor or Stock Pusher? Finance Bill May Not Settle It,” in The New York Times, on March 3, 2010. She wrote of one securities analyst who follows the financial industry for Bank of America Merrill Lynch, Guy Moszkowski. He projects that, if the fiduciary standard of conduct were extended to brokers who provide advice to investors, it “could cost a firm like Morgan Stanley Smith Barney as much as $300 million, or about 6 to 7 percent of this year’s expected earnings.” That’s $300 million. A year. For one large firm.

To put it another way, if that firm had to act in the best interest of the clients it advises, under the fiduciary standard of conduct rather than the suitability standard that brokers operate under, it would earn less in fees and commissions. Why? Because it would not be able to sell products that have layers and layers of hidden fees. Because if it disclosed to investors in writing what the total cost of what is sold to them is, the investor would go elsewhere. But the flip side is, once the public learns of this, it will be crystal clear how much extra they pay for the privilege of being sold something that’s in the broker’s best interest.

Investors are not stupid. They are learning that this adds up to real money and it’s coming directly from them. Why else are they rushing away from large brands to registered investment advisors (RIAs), who must put their clients’ first?

And although RIAs must control costs as part of their fiduciary duty to clients, they are by no means paupers. RIAs are for-profit entities. It’s a model that has worked for 70 years. The costs RIAs charge investors must be “reasonable” according to the “facts and circumstances” and that doesn’t always mean the low cost provider. Thus this logic could follow: if RIAs must control costs–keep them reasonable–(and yet somehow they are still profitable), then we have to ask just one question.

If a B/D will make “$300 million” less a year if it must provide advice under a fiduciary standard, then is its current suitability model and fee structure–what it is charging customers–unreasonable?

Investors are realizing that they have a choice: get advice from someone who puts investors’ interests first, or advice from someone who puts their own interest first. This is not a difficult choice, once investors understand there is a difference. And the study, if that’s the way the legislation ends up after reconciliation of the House and Senate bills can only help this come to light.

What do you think?

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

April 12, 2010 Investors in 401(k) plans who are frustrated by proprietary funds, opaque high fees, revenue sharing and sub-par performance are starting to get overtures from lawyers who are gathering investors for class action suits against 401(k) providers…. Six Choice Pieces of Fiduciary Misinformation March 18, 2010 There is a great deal of chatter surrounding the fiduciary movement that is just plain incorrect–as in, not fact–whether from ignorance or deliberate obfuscation. Why Shouldn’t Investors’ Best Interests Come First? February 25, 2010 Are Senators strong enough–and do they have enough integrity–to stand up on behalf of retail investors and insist on extending the fiduciary standard to cover those who provide advice to retail investors?… Greater Good: The Unintended Consequences of Repaying TARP January 29, 2010 Did the requirement to repay TARP funds in order to pay bonuses for 2009 prompt some banks to repay the bailout funds too early? … Smart Money January 19, 2010 Goldman Sachs Chairman and CEO Lloyd C. Blankfein testified that at Goldman Sachs, “…we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors.” … Ever Hopeful December 29, 2009 As we emerge from a challenging economic crisis, there is reason to hope that changes and opportunities we will see in this new year–some as a direct result of the economic crisis–will be positive…. Schapiro’s Call for Fiduciary Standard Reflects SEC’s Original Mandate December 07, 2009 “I believe that all securities professionals should be subject to the same fiduciary duty,” says SEC Chair Mary L. Schapiro…. Mr. Dodd’s Message from Washington November 16, 2009 Now that we have heard from both the House and Senate committees on finance and banking about investor protection, let’s not misinterpret what they are saying. Can the DJIA at 10,000 Inspire “Animal Spirits?” October 16, 2009 The Dow Jones Industrial Average hit a year-to-date high and jumped above 10,000 on Oct. 14, and the next day hit another high of 10,062.94. Unless you are short, this is good news for you and for your clients. “Federal” versus “Authentic” Fiduciary Duty October 08, 2009 Both investment advisors and broker/dealer registered representatives routinely give financial and investment advice to clients. What is still different is the rules that protect those investors…. Are you Ready? September 22, 2009 Financial reform is around the corner. How will it affect you and your clients? The Capital is abuzz with discussions regarding re-regulation of financial services, something that the Administration wants to see passed by year-end…. “Trust Doesn’t Come and Go”

Once an advisor has that trusted relationship with a client, how can the advisor “go back” to a non-fiduciary relationship? The answer is they can’t.


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