Four years ago next month, President Obama signed the Dodd-Frank Act into law. As most independent advisors are well aware, Section 913 of that law reasonably called for a fiduciary standard for brokers “that is no less stringent than for RIAs” under the ‘40 Act, and “harmonization” of the regulation of brokers and advisors. At the time, many independent RIAs (and those of us who observe them) applauded at least this section of Dodd-Frank for bringing today’s asset-managing, advice dispensing brokerage industry into the 21st Century.
Almost half a decade later, we’re still waiting, with considerable dismay. Instead of increased investor protections and a level playing field, we’ve watched:
- the SEC drag its inactive feet on implementing Dodd-Frank, year after year
- FINRA and SIFMA “embrace” fiduciary standards while continuing with business as usual
- most mindboggling of all, a whole-scale regulatory crackdown on RIAs (yes, the very people whom Dodd-Frank held out as a regulatory model for brokers), under the cover of the Bernie Madoff scandal—who, of course, was a former board chair of FINRA/NASD.
I offer this Dodd-Frank recap as a reminder of how reasonable sounding ideas can have very unintended consequences in the hands of the securities industry and its “regulators,” as the industry now attempts to turn the public’s focus away from a fiduciary standard for brokers, and toward “fee transparency.” While the notion of investors knowing exactly how much they pay for what sounds like a no-brainer, my bite marks from Dodd-Frank still haven’t healed. That makes me wonder if independent advisors might want to think through this “fee transparency” thing before they jump on that bandwagon.
“What could possibly be the downside of fee transparency?” I hear you ask. Well, for one thing, SIFMA is for it—which if nothing else, should give us all pause. As Mason Braswell reported April 10 on Investmentnews.com, John Thiel, head of Bank of America Merrill Lynch’s wealth unit, told attendees at a SIFMA private-client conference in New York: “As major financial firms look to establish more trust among clients, they need to do more to be upfront with clients about the fees that they are being charged for advice and financial products. As an industry, we need to create transparency. We have got to get there in terms of transparency around fees.”
Sounds pretty good, right? Well, call me a skeptical old coot, but let’s think this through for a minute. First, what’s the biggest challenge facing Wall Street brokerages today? Lack of client trust? I doubt it: I don’t remember brokers finishing near the top of many public trust polls I’ve seen in the past 20 years. No, it’s the +10-year breakaway broker trend, with top “producers” leaving in droves to set up independent RIAs and keep 100% of the AUM fees from the wealthy clients who left with them.
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Why is this important to fee transparency? For starters, is it just me, or does it seem rather coincidental that at the peak of broker diaspora to independence, major wirehouses like Merrill Lynch would suddenly see the light and start talking about coming clean with clients about the fees they are paying? Which brings us to issue number 2: What’s the real difference between a broker and an independent advisor?
To my mind, the difference is independence: brokers at wirehouses are W-2 employees of their firms. Which means their compensation comes from the firms, not the clients—creating the illusion that clients get “free” advice.