Readers of this column know I haven’t been a big fan of the CFP Board and its leadership of the Financial Planning Coalition during Washington’s attempt at financial re-regulation over the past 18 months. In my view, the efforts of both the Board and the Coalition have been far too focused on the questionable goal of advancing the stature of financial planning (dare I say, empire-building?), at the expense of lending their full support to the most significant consumer-oriented legislation in 70 years: establishing a fiduciary standard for brokers.
Perhaps, then, you can appreciate the lack of enthusiasm with which I greeted an e-mail from the Board’s managing director of public policy, Marilyn Mohrman-Gillis, containing the Financial Planning Coalition’s Comment Letter on the Securities and Exchange Commission’s “Study Regarding Obligations of Brokers, Dealers and Investment Advisers…” Maybe, too, you have some small inkling of what I can only describe as my total shock as I read through the Coalition’s letter. In over 25 years as a financial journalist, I can honestly say that I’ve never been more pleasantly surprised.
To say that the Coalition’s comment letter is “good,” doesn’t begin to do it justice. The Financial Planning Coalition’s Comment Letter to the SEC is the best case I’ve seen for the necessity and consumer benefit of a fiduciary standard for brokers. Even on the problematic issues that I haven’t supported–commissions, proprietary products, and wearing “two hats”–it offers solutions that are so reasonable I found myself nodding in agreement. Hopefully, this Letter will go a long way toward convincing the SEC to do the right thing by financial consumers; and will also form the basis for how the Board will define and apply the fiduciary standard to all CFPs as well.
The Letter starts out with the strongest support for a real fiduciary standard that the Coalition (comprising the CFP Board, the FPA, and NAPFA) has yet made: “The Coalition believes that establishing a strong and uniform fiduciary standard of care, consistent with the standard currently applied to investment advisers under the Investment Advisers Act of 1940, for all financial professionals who provide personalized investment advice to retail customers … is among the most important investor protection initiatives that the Commission could undertake.”
What the Coalition is suggesting here is essentially eliminating the broker exemption to the ’40 Act, which I’ve felt would be the simplest and least ambiguous way to level the playing field, or “harmonize” the differing standards for brokers and RIAs. If Congress simply dictated that the currently well-established standards for RIAs would apply to anyone who provides retail investment advice, it would be clear to everyone (especially consumers) who falls under those standards, and what those standards are.
The Coalition letter points out that the current FINRA suitability standard is “ineffective in protecting investors” and rightly cites the 2008 Rand Institute Report to the SEC, which found that “retail customers do not understand the regulatory differences between broker-dealers and investment advisers or the standards of care that apply to each.”
The Unsuitable Suitability Standard
While there really isn’t any part of the Coalition’s Letter that I don’t like, one of the best sections is its careful examination of the deficiencies of FINRA’s suitability standard when compared to the RIA fiduciary standard under the ’40 Act. Here’s a listing of a few:
The suitability standard does not require a broker to act in the client’s best interest. “In a given situation, several different securities may satisfy the standard of being suitable for the client, and a broker is free (without disclosure of this fact) to recommend the one that is most highly remunerative to the broker, even if the broker believes that other choices in fact would be better for the client.”
Consumers have fewer legal rights under the suitability standard.