In a Watershed Year for Fiduciary Standard, Reviewing the Arguments

Welcome to Fiduciary September. The Institute for the Fiduciary Standard annually celebrates Fiduciary September to highlight the indispensable role fiduciary principles serve in preserving trust and confidence in our capital markets, and we believe 2013 may be a watershed year. The very meaning of ‘investment advice’ for retail investors may be fundamentally altered under intense industry pressure. 

While the direction of the new SEC leadership is uncertain and the DOL re-proposal is not yet submitted, the tactics and the tone of brokerage industry opposition deserve greater attention. It is changing. Where once the industry expressed concerns of limiting choices and increased costs and also sang the praises of disclosure and contracts in sales transactions, it’s now ratcheted up its rhetoric. Its voice is louder and its statements are more severe.   

The brokerage industry has surrounded the offices of regulators and members of Congress and declared war on fiduciary duties. A barrage of unsubstantiated and dubious industry claims dominate their argument. These assertions link putting investors first with untold damages to investors: cost increases and product inaccessibility that inevitably will lead to hordes of small investors abandoned by brokers to fend for themselves. 

In other words, the industry’s case rests on an extraordinary argument. The argument is extraordinary because the argument parallels the arguments of critics who say brokers are too conflicted to give objective advice. It is this: Brokers will abandon the market en masse if required by law to do what most brokers already say they do, or clearly imply they do: put clients’ interests first. 

The argument seems cynical because it overlooks the industry’s own position. The fact is many industry participants spent years (decades by some counts) clearly communicating or implying their fiduciary status to clients and the world, before regulators recommended the rules be tightened. Brokers who make this argument (many will not) will appear as if they held themselves out as trusted advisors as long as they were not held accountable for being trusted advisors.

This argument is also extraordinary because it seems implausible on its face, based on retail investing as it was 40 years ago. In 1973, fixed commissions still ruled and index funds were still a pipe dream for retail investors. Vanguard founder John C. Bogle and Schwab founder Charles Schwab had their life’s work still largely ahead of them.

To believe the brokerage industry argument then, you have to overlook the new competition, regulatory changes, technologies, products and services, investing opportunities and the Internet-based services that have created far more opportunities for small investors since 1973. You have to overlook the many alternatives to full-service brokers and investment advisors who serve small investors, offering quality and ethical investment advice or guidance at a reasonable price. 

Further, the brokerage industry seems to assume the public believes it is over-regulated while surveys suggest that the exact opposite is true. How the brokerage industry views the public is not unimportant. In a recent New York Times article, former Treasury Secretary Hank Paulson observed that the banks that received TARP funds and paid out billions in 2009 in bonuses exhibited “Colossal lack of self-awareness as to how they were viewed by the American public.”