In the in-person roundtable featuring the leaders of Investment Advisor’s 24th annual Broker-Dealers of the Year, we asked them to respond to four common scenarios faced by independent BDs.
Here’s how David Stringer of Prospera Financial, Doug Wright of The Investment Center, Kevin Bachmann of Questar Capital and Eric Schwartz of Cambridge Investment Research responded to the third scenario on how broker-dealers should respond if the SEC were to impose a fiduciary standard on broker-dealer reps.
Scenario 3: SEC Imposes Fiduciary Standard on Reps
Following the lead of the Department of Labor, the SEC mandates that all financial advisors must adhere to the fiduciary standard mandated by the Advisers Act. The RIA custodians have made a concerted push to attract your top producers to the RIA model, offering financial incentives and marketing support. How do you respond?
Doug Wright, The Investment Center: I know [SEC Commissioner] Gallagher said some pretty interesting things about that. He said you may see some movement right before the election on it. I’m talking this fall’s election, not the presidential.
What Your Peers Are Reading
Then you see the back and forth: It’s off the table; it’s on the table; it’s next year, the DOL may be coming out next year with it. It’s all over the place.
Jamie Green, Investment Advisor: I’ve been paying attention to this particular issue for a while, but I’m always interested in what’s going on in Washington. I guess it’s not law, but I guess it’s by custom that the SEC is always half Republican, half Democrat, and then you’ve got the chair at the top who’s obviously appointed by the president, so it’s going to be a member of that party.
It seems like there’s a fair amount of—what shall I call it?—partisan bickering among the commissioners, which I don’t remember seeing before.
Eric Schwartz, Cambridge Investment Research: It may have to do with how much bickering is going on in Congress.
Green: Eric, you already said that you asked a similar question at your national conference. Just about everybody there said they already feel [they have a fiduciary standard].
Schwartz: Yes, I don’t think most advisors in my world, and again, my advisors are a little more fee oriented, a little more mature, perhaps, in their careers than maybe the average [rep, but] it seems like most advisors don’t go, “Oh, okay, I’ve got this fee client, so I’m going to be meeting a fiduciary standard with him. Over there, I’ve get this commission guy, I’m just going to give him a suitability thing.”
The suitability role is enforced by FINRA to be the fiduciary rule right now. When they sue you, they don’t say, “Well, this wasn’t suitable.” They say, “It wasn’t the best investment.” They say, “You should have done this.” In many ways, we’re in a fiduciary world already. The advisors, 98% of our advisors, think that they’re acting in a fiduciary manner for all their clients right now.
The key is how ‘fiduciary’ is defined. There are lots of different definitions of fiduciary and so it depends on which one [is used] and what is going to be the mechanism under which it’s enforced or kept track of that has been the issue.
One of the issues has been, ‘How do you, on a fiduciary basis, do a one-time transaction like putting $2,000 into an IRA where you’re not going to talk to the client for five years?’ Under many definitions of fiduciary, that doesn’t meet the rule. You have to not take them in the first place.
I think the main concern of broker-dealers and of FSI is how they’re [the SEC is] going to define fiduciary and how that’s going to translate to another blizzard of paperwork where people are filling out all kinds of things to show they acted in a fiduciary way.
No one in the industry’s going to get up and say, ‘Well, I really don’t think we should take into consideration doing what’s best for clients.’ It’s a given that everybody wants to do what’s best for clients. But how do you create a law and then put together paperwork that supports that? What does it do to business procedures?
David Stringer, Prospera Financial Services: Yes, how do you codify it?
Schwartz: That’s the big issue that’s really going on. The Department of Labor has one definition of what’s going on and the SEC’s trying to come up with their definition. That’s different than your previous question where you were asking, what if [the SEC did impose a fiduciary standard]?
Green: Yes, that’s what I’m saying.
Stringer: We’re past all that, we’ve figured all that out. Now what?
Green: “Now what?” Or, is it “So what?”
Stringer: I would say that’s it’s probably “So what?” because I think about the services that we provide to our advisors. They look to us for some of these value-added services that are more than just processing a business.
We have a virtual sales assistant program that we offer that’s outsourced services like that. Whether you’re a broker-dealer or you’re an IA, they’re looking to outsource some of these capabilities to a firm like us. We do a lot of back-office support for them.
I just spoke with Amy about HR Essentials, because we have an HR person, who we’re trying to find out how we can support our advisors using and leveraging our…
Schwartz: That’s Amy Webber [president of Cambridge]. We have an HR program for our reps.
The Changing Roles of Broker-Dealers
Stringer: We’ve got some money management programs that we’re doing for our advisors, where we’re taking the signals and we’re providing some tactical money management capabilities for them. There are things like that we do whether they’re an IA or with the broker-dealer. I think what they’re looking for is, “Hey, can you help me run, grow and protect my practice?”
Some of these guys were going to the IA [route] because they were trying to do a regulatory arbitrage. I think that the playing field, over time, will level out. Some of those guys are not going to want to deal with some of the compliance activities.
They’re in this business because they want to support and help their clients achieve their financial goals. They don’t want to do some of the compliance work that we do, no matter what fence they’re on. I would just say, for me, [impostition of a fiduciary mandate) is more of a “So what?”
Kevin Bachmann, Questar Capital: I totally agree: “So what?” from our perspective. I mean, I think the advisors treat their clients the same, as Eric said. They don't put on different hats. They do what's in the best interest of the client, whether that's a commission or that's a fee.
I think they've confused the issue a little bit with the whole “Is it education versus investment advice?." Now the advisors are trying to figure out, “Well, how can I just educate them without crossing that line into investment advice?” That's going to be an issue.
As David said, a lot of [advisors] were going RIA-only to get away from regulation. I think that’s a bigger issue right now. I think they should focus on ‘What are you going to do with these small RIAs that are out there that basically gave up their securities licenses to do that with very little regulation?’ I think that’s a bigger issue.
Green: In terms of the public being protected?
Bachmann: Correct. Whether or not fiduciary versus non fiduciary or suitability standard. I mean, really, [the issue for the SEC is to] get your arms around the independent RIA space.
Green: You mentioned the line between education and advice. Isn’t there something in ERISA about that; that people can provide education, but if they provide any kind of advice, then they’re a fiduciary under ERISA?
Wright: They’re a fiduciary and then they come under ERISA on ERISA accounts.
Green: Of course.
Wright: Education’s broad; advice is to the individual person. You can advise the plan, but once you get down to providing individual advice…
Schwartz: You can have a meeting with 100 people and you can say, “This fund is more aggressive, this one’s more conservative.” That’s education. Advice is when I say, “Well, based on your age… .” Coming back to the other part of this question, we have competition from other independent broker-dealers, [but] we also have competition from the fee-only side of things. That’s been true for a long time.
I’ve been in the middle of that more than most because we’ve been 50% fee-based for 20 years, and we have a lot of assets that were sitting at Schwab and so on, so we’re right in the middle of that.
Schwartz: An advisor can look around and say, “Gee, I could get rid of my broker-dealer and not have to deal with FINRA. Why don’t I just take the next step?” There’s certainly been a regulatory arm charge, where there’s a reasonable number of advisors that are fee-only to get out from having the heavy regulation on the broker-dealer side that doesn’t exist on the RIA side. As we talked about earlier, 40 some odd percent of all RIAs have never been audited. I can tell you that 40% of my reps have been audited every year [laughs]. It’s a different story.