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Raymond James, the New Borders Bookstore?

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Recent statements by two brokerage industry leaders suggest a new way for fiduciary advocates to reframe the fiduciary regulatory battle. Think “disruptive innovation.”   

First, SIFMA president Ken Bentsen, the voice of the brokerage industry in Washington, recently wrote an extraordinary column on fiduciary duty rulemaking. Extraordinary in how a new bold and unfounded assertion in the column, an assertion that even surpasses prior SIFMA bold and unfounded assertions, helps Bentsen conclude that the DOL proposal “could do more harm than good.” 

Bentsen argues that DOL fiduciary rulemaking is unnecessary because investors are doing just fine under current broker-dealer rules. He writes: “Broker-dealers act in their clients’ best interest … (and) are held to high industry standards.” 

Bold assertions are nothing new at SIFMA. John Taft, then SIFMA chairman, told Congress in October 2009 that “SIFMA’s vision of a harmonized fiduciary standard is even stronger, and more pro-investor, than any other alternative we have heard advanced.” 

Taft’s bold 2009 statement is apparently insufficient in 2014. Bentsen now says that broker-dealers already adhere to a “best interest” standard and, apparently, already meet the “more pro-investor” standard Taft advocated in 2009. The obvious conclusion: Check. Job done. No rule-making needed.      

I present this as a terse reminder of Washington ways. Fiduciary advocates, understandably, complain that fiduciary opponents succeed in Washington, in part (how does one say this nicely?) by making statements that are clearly dubious or plainly false. This complaint is valid, but so is the comment that politics isn’t beanbags. Since when were politicians and lobbyists held to the fiduciary standard of ‘utmost good faith?’ This is Washington. 

Viewing the regulatory battle through a lens of “disruptive innovation” may be more fruitful.

Harvard professor Clayton Christensen’s research on “disruptive innovation” has a turned a lot of heads. The classic example is keenly familiar to tens of millions of consumers of books: Amazon “disrupting” Borders and Barnes & Noble. 

Or take the example of management consultancies. An Economist article last year reviewed how Christensen views management consulting firms and especially industry leader McKinsey. The Economist noted that “McKinsey’s success depends above all on an unimpeachable reputation for integrity” and yet, along with the two other major consulting firms, “The big three strategy consultancies … are masters of opacity.” The change driver in top tier management consultancies, the Economist suggests, is more and better transparency, competition, and technology. Sound familiar? 

Fiduciary advocates need to reframe the battle. Think disruption. “Disruptive innovation” has been undermining the traditional broker-dealer business model for 40 years; Schwab and Vanguard being the pioneer disruptors. The regulatory battle today is not just about investor protection. It is better understood as whether regulations will protect business models with rules that allow massive opacity, material conflicts of interest and deceptive communications—or not. Whether disruptive innovators will be able to pierce protective regulations and lower costs, increase choices and improve investors’ financial security, or not. 

Brokerages themselves know this, of course, but don’t usually admit it. In Washington last week one brokerage leader sounded as though he did admit it. Raymond James president Scott Curtis called his brokers to action to “oppose the Department of Labor’s fiduciary proposal.” He did much more, though, when he went off message and essentially acknowledged that his concern with the proposed DOL rule is not about investor choice, but industry survival, when he is quoted saying, “We don’t think this is healthy for the industry.” 

The question is whether anyone who heard Curtis also heard Clayton Christensen, whether Raymond James is the new Borders and, if so, who is the new Amazon?