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Industry Spotlight > Broker Dealers

The Playing Field: The Dodd-Frank Reform Bill Afterlife

By Melanie Waddell

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It’s been more than a year since I took a hiatus from writing about the competitive playing field to focus on covering the colossal financial services regulatory reform debate as it unfolded in Washington. In my last Playing Field column in January 2009, the Obama Administration was about to be ushered in, and regulators and industry officials were telling advisors to brace themselves for Congress’s inevitable reworking of the financial services regulatory landscape. I reported at that time, too, that advisory trade groups had joined forces to lobby Congress on how the refashioned regulatory landscape should affect the advisory profession. By many measures, those lobbying efforts worked.

Look where we are now. Amazingly, the advisory industry was able to overpower the deep-pocketed and persistent lobbying efforts of the insurance and brokerage industries that fought against applying a fiduciary standard to them and convince Congress that anyone providing retail advice should be a fiduciary. The Securities and Exchange Commission (SEC), under the Dodd-Frank Wall Street Reform and Consumer Protection Act that became law on July 21, has the authority to put brokers under a fiduciary standard of care.

SEC Chairman Mary Schapiro stated quite a few times over the past year–including in an interview with me–that it was crucial that Congress give her the power to put brokers under a fiduciary mandate. After performing a six-month study of the “effectiveness” of existing standards of care for brokers and advisors, the securities regulator has the authority to impose a “harmonized” fiduciary standard on brokers and advisors that provide retail investment advice.

We’ll have to wait and see what this “harmonized” fiduciary standard looks like. Schapiro is ensuring that the advisory industry gets a fair shot at telling her, and the SEC Commissioners, how such a standard should be crafted. As Schapiro explained in a late July speech she gave in Washington, under a new process, the public will now be able to comment before the SEC proposes its rules and before the official comment period opens. This new process, Schapiro said, “Goes well beyond what is legally required and will provide expanded opportunity for public comment and greater transparency and accountability.” Comments regarding putting brokers under a fiduciary standard have been flooding into the agency since the SEC began soliciting comment in late July.

All Eyes on the SEC

With the passage of the Dodd-Frank Act, Congress has punted the hard work to the SEC, and it’s now up to the securities regulator to make some tough decisions–chief among them is crafting a fiduciary standard for brokers. The devil is most assuredly in the details here, and while applying a fiduciary standard to brokers will level the competitive playing field for brokers and advisors, independent advisors may lose some of their competitive edge.

Harold Evensky, president and CEO of Evensky & Katz Wealth Management, and a member of the Committee for the Fiduciary Standard, says that from a purely business standpoint, a fiduciary standard for all “will be a marketing negative for firms like mine as the ‘fiduciary’ story is a significant benefit we offer potential clients that they do not currently get from the wirehouses.” Independent advisors will lose “that [fiduciary] marketing arrow,” he says, but “that loss will be more than offset by the benefit to the investing public.”

Indeed, with a fiduciary standard for all comes unintended consequences, agrees Don Trone, CEO of Strategic Ethos in Mystic, Connecticut. “Fiduciary,” he says, was a “powerful demarcation between brokers and advisors; remove that distinction and advisors are likely to experience very stiff competition from broker-advisors who can draw upon the considerable resources of the wirehouses.” Plus, the additional administrative and regulatory rules that will likely come with a new fiduciary standard, Trone continues, “may have the unintended consequence of driving the independent advisor into the arms of a larger organization.”

Don Trone Suggests: Get Professional

Once a fiduciary mandate is applied, “professional skills,” Trone argues, “will be the new demarcation between the good and the great–skills such as effective leadership behaviors; the capacity to build client trust, and maintain client loyalty; and the ability to manage an effective decision-making process.”

But broker/dealers will have to tread carefully in using their fiduciary status as a siren call to attract potential business, argues Michael Koffler, a partner with Sutherland, Asbill & Brennan’s Financial Services Practice Group. “If broker/dealers start advertising they are fiduciaries, then there’s a possibility that could come back to bite them if they also are not equally diligent in disclosing, for example, limits on the products that they offer and conflicts of interest associated with any [product] recommendations.”

Evensky says he is “cautiously optimistic” that the end result of the SEC’s study of advisor and broker obligations “will result in a substantive fiduciary standard being applied to anyone providing investment advice, independent of compensation structure.” But it’s important to note that any fiduciary standard enforced by the SEC would apply only to those who give retail advice. A fiduciary mandate “would in no way eliminate traditional brokerage business remaining under a suitability standard,” and “it would also not prevent the sale of proprietary product or dealing with in-house market makers as long as the sales adhere to fiduciary principles.”

To be sure, there are financial services and insurance lobbying groups that have opposed succumbing to a fiduciary standard, and these firms continue to tell the SEC that applying a fiduciary standard to them is a bad idea. But as Evensky points out, a number of surveys have revealed that “the majority” of brokers support being a fiduciary. But not all registered reps will choose–or be offered the chance by their broker/dealers–to take up the fiduciary mantle, Trone argues. (see sidebar)

I started The Playing Field way back in 2001; the financial services world has changed a lot since then, and we’ll be witnessing even more change as the effects of the Dodd-Frank Act reverberate across the industry for years to come–specifically as the SEC spends the next 18 months implementing the law’s many changes. Yes, the strategies that advisors of all stripes will use to compete on the advisory playing field will continue to evolve–new product and marketing innovations, strategic personnel hires, as well as the regulatory and legislative rules that govern the playing field are ever changing. I hope you join me each month as we explore how the strategic moves being implemented by your peers, competitors, partners, regulators, and lawmakers, ultimately affect you.

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