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Regulation and Compliance > Federal Regulation > SEC

Senate Votes Yes on Financial Reforms

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As Deputy Secretary of the U.S. Treasury Neal Wolin said on July 15 at SIFMA’s Regulatory Reform Summit, “reasonable people will disagree on some details, just as reasonable people will undoubtedly have different opinions on the details of rules and other implementation work going forward.”

All in all, many of the provisions are good–or have the potential to be good–for individual investors, and/or consumers. In fact, given the extensive lobbying efforts by what Vanguard’s Founder, John C. Bogle calls the “financial industrial complex,” it is a wonder that so many pro- consumer or investor provisions made it into the bill. Barney Frank’s and Christopher Dodd’s legacies are looking better, at least to investors.

For investors, the fact that the bill “Gives SEC the authority to impose a fiduciary duty on brokers who give investment advice–the advice must be in the best interest of their customers,” according to the summary release from the House Financial Services Committee, will probably make a direct difference to more investors than any other provision. This editor is a member of The Committee for the Fiduciary Standard.

Yes, the adoption of rules after the SEC study is still very open and it is up to the SEC to continue to get back to its roots as the agency that protects investors. The SEC has been under fire for all sorts of reasons, some of it due to a politically-driven choking off of funding that the Commission already earns but doesn’t receive (my next blog), but Chairman Mary Schapiro and Commissioners Luis Aguilar and Elisse Walter have been on the record regarding extension of the fiduciary standard, as in the Investment Advisers Act of 1940, to brokers who provide advice to retail investors.

The fiduciary standard for all who provide advice will go a very long way toward protecting investors from practices like high, and frequently not clearly disclosed, fees paid for shelf space on some firms’ platforms, layers of fees in proprietary products, and imprudent conduct on the part of some actors in the financial services industry. While it won’t directly cut those fees, fidicuaries are required to control investment costs for their clients and clearly disclose total costs to invesors.

I heard, at an industry conference recently, about some firms that would not be able to stay in business if they were not able to sell “alternative” products that pay high commissions–under a fiduciary standard of conduct.

In other words, if they had to put their clients’ best interests first, they couldn’t sell these “products.” That seems like a shaky business model to start with and maybe this is the time to revisit that particular business model. If you can’t stay in business without gouging customers, maybe the SEC–and FINRA–should examine that.

One has to ask if they could not sell these securities under a fiduciary standard of care, then, in the interest of investor protection why are those securities permitted to be sold to retail investors in any case? And if proper disclosures are made, and understood by the customer, what customer would actually buy them?

Maybe it is time to revisit that model, on a long-term rather than a short-term basis. Maybe if these firms looked at the model from a client-centric point of view they could see a way to attract more assets under management and smooth out earnings over the long term by charging a fee for AUM or an hourly fee like a lawyer or accountant, both of whom have a fiduciary duty to their clients. As I have said before in this space, commissions are not prohibited under the fiduciary standard, and the low-cost option is not necessarily the only choice. But controlling investors’ expenses and disclosing the total costs to them (including shelf space, or any other layers of costs), is required. It is imprudent to waste investors’ money. So a higher cost option would have to be justified by the facts and circumstances, and the reasons for choosing it would need to be documented.

Long term, strategic thinking about what is right for investors, who provide a great deal of support for capital formation in America, is required here. Many individuals are now required to invest in order to provide for their own retirment nest eggs via defined contribution plans.

Transformational change after regulating industries is not new. This is a cultural change. It is a business shift. But over the long term it should be beneficial to both firms and clients.

Rather than spending the vast intellectual resources of financial services firms thinking about how to, as one broker/dealer leader put it, “water down, dilute…dismember the fiduciary standard of care,” firms need to think, now, about how to alter their model so that it will work in the long-term best interests of their clients. It is the only way for trust to return to Wall Street. and over the long term it will be in the interests of financial services firms to make this transformation.

Because now, with the SEC’s study to get underway, clients are going to understand the difference between advisors who are, or will be, fiduciaries–and put clients’ best interests first–and those who won’t.

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.


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