The midterm election results are still fresh and Wall Street’s grin, with a friendlier Congress in hand, is still wide. Voters sent a message and both sides agree on this much: the election was a referendum on the president and he lost. Big time. What if an election were held on Wall Street? What message would investors send?
Would the record high Dow form a wave for Big Bank titans? Or would the deluge of reports of Wall Street bad behavior and record-setting fines fuel a counter-insurgency to reform “The Street?”
This is no idle question for armchair quarterbacks. Recent remarks from industry executives serve as terse reminders why.
At Schwab’s annual celebration of RIAs, Schwab executive Bernie Clark noted RIAs need to attract younger investors, and then made a point that bears repeating, “(Younger investors) do not know who you are… they confuse you with Wall Street movies they have been watching.”
Then, last week at a Securities Industry Financial Markets Association (SIFMA) meeting, there was talk of the lobby group’s “election strategy” for defeating fiduciary rulemaking at the Department of Labor. Former SIFMA chairman Jim Rosenthal boasted of its lobbying victories to date, and then offered a peek into what’s ahead. According to Mark Schoeff of Investment News, Rosenthal said “essentially we mobilized thousands when we have the potential to mobilize hundreds of thousands of employees and millions” of customers.
Mobilize for what? According to Schoeff, Rosenthal left nothing to the imagination. “Rosenthal asserted that the rule would force IRAs to be held only in managed accounts that charge investors fees based on assets under management. It would curtail their being offered in brokerage accounts that charge investors on a transaction basis for trades. He said that such an arrangement would prevent brokers from servicing small accounts.”
One problem: the message is not true. The claim is false.
DOL Assistant Secretary Phyllis Borzi has repeatedly said the rule would not prohibit commissions with IRAs. As such, in political parlance, the SIFMA claim, with no basis in fact, is simple fear-mongering. It is intended to galvanize the SIFMA base to write their member of Congress and explain how, in SIFMA’s world, fiduciary practices harm investors and sales practices benefit investors.
Will SIFMA succeed? Will “millions” of investors be misled and then decry fiduciary duties, and demand that Congress stop the DOL? The record suggests they just might. Congress has already heard these arguments and many policymakers seem to believe them. Just imagine what “millions” of emails and letters to the Hill could do.
Keep in mind how audacious the core argument is.
The core argument is camouflaged as “lost choice” to be investor friendly, yet its essence is that fiduciary advice harms investors’ health.
That argument turns history and law and reason upside down — think arguing for the health benefits of cigarette smoking — and concludes fiduciary rules are hazardous. (Recall the early warnings about cigarettes: “The Surgeon General Has Determined that Cigarette Smoking Is Dangerous to Your Health.”) The corollary argument, which is equally audacious but is made openly, is that conflicted advice is good for investors.
Five years into its campaign, lobbyists’ sustained attack on fiduciary advice has taken a toll. And more attacks are apparently on the way.
What have advisor groups done? Throughout this campaign advisor groups have mainly fought gallantly in Congress and the regulatory agencies. (An exception has been CFA Institute, which has taken the battle for the “Future of Finance” to investors through the airwaves.) They have fought to persuade policymakers that fiduciary advice is better for investors, that credible research does document the higher costs and poorer-quality results associated with certain sales practices, and that concrete investor harms do result when, as Rutgers law professor Arthur Laby notes, brokerage customers are essentially deceived. The only problem is too few policymakers have listened.
Make no mistake: the Wall Street “election campaign” is on, brokerage lobbyists have framed the debate and fiduciary advisors are way behind in the polls. We are way behind not because our platform is weak or because fiduciary advisors are “outspent.” First and foremost, we are way behind because, as Bernie Clark notes, in the public mind fiduciary advisers essentially do not exist, not unlike unknown candidates. (Quick, name the former Montana governor considering running in 2016 Democratic presidential race.)
The campaign’s relevance should not be dismissed. There is much at stake. If the campaign for “choice” and “conflicted advice” succeeds, it would be a horrendous blow to investors and to the capital markets. But it would hardly be the first time in history that false claims and fear-based rhetoric won over reason and established law at the ballot box.
Advisor groups need to engage in this campaign in the public square. We need to shed most of the buzzwords we often use and, literally, introduce fiduciary advisors to investors, as we might introduce ourselves to a new neighbor. We need to speak directly and plainly. We need to take seriously brokerage industry lobbyists’ talk about their plans.
If we believe in what we do, we also must recognize we have no choice but to publicly rebut the hugely erroneous assertions and call out bad behavior.
For general guidance, we could do worse than take a few pages out of the books of Jack Bogle (disclosure: I’ve edited one such tome) and Warren Buffett. Or learn from the lesson that is the Schwab ad campaign highlighting fee opaqueness. Finally, we need to speak clearly and concretely to investors about what differentiates fiduciary advisors and be confident investors will choose wisely.
Only then will we turn the election around and win one for the investor.