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Wall Street finally blinks in fiduciary standoff

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I like my bad guys to be evil geniuses, not bumbling buffoons. I like Lex Luthor; not Toy Man. The Joker; not the Penguin. Newman; not Kenny Bania. Vampires; not Zombies.

It’s my biggest disappointment about the CFP Board: Not that they’re in process of selling out the profession of financial planning to Wall Street; but that they’re going about it like the “Three Stooges. ” (For those of you born after 1970, think “Beavis and Butthead.”)

It’s also why I’ve always had a grudging respect for the brokerage industry. You just have to admit: those guys are good. Right from the beginning they got brokers exempted from having a fiduciary duty under the Investment Advisers Act in 1940, and they never looked back. They almost succeeded in getting the SEC to extend that “broker exemption” to managed assets—and would have, but for the FPA. And, look at how they’ve handled the Dodd-Frank mandate for a fiduciary standard for brokers! First, SIFMA stated that it wantedbrokers to be fiduciaries for their clients; but of course, they’d have to “tweak” the ’40 Act standard to fit the brokerage business. We’re still waiting for those tweaks. 

Then they invented the concept of “business model neutrality” arguing persuasively that brokerage firms just couldn’t stay in business if they had to put the interest of their clients first (as if this makes any sense at all).

After that, despite all their efforts to attract the wealthiest clients in the country, they became “champions of the little guy,” arguing that “putting the clients first” would make advice just too expensive for small investors. Finally, they managed to refocus “harmonization of securities regulation” into “the SEC doesn’t audit independent RIAs often enough.” As Kenny Bania would say: “This stuff is gold, Jerry, gold.” 

The net result of all this public relations brilliance has been that five years after the Dodd-Frank Act was signed into law, the securities industry is not one inch closer to a fiduciary standard for brokers. So imagine my surprise last month when the “geniuses” in the securities industry made one of the biggest PR blunders in recent memory. Of course, I’m talking about the widely reported White House “memo” on the Department of Labor’s fiduciary initiative that was “leaked” to the public (see Melanie Waddell’s Jan. 23 ThinkAdvisor story, White House Memo Offers a Peek at DOL Fiduciary Strategy.) It was a rookie blunder of epic proportions—one that has resonated in the mainstream media and may well have turned the tide of public opinion back in favor of fiduciary investor protections.

As Melanie reported, the memo in question was not a public relations softball, to be sure. Written by Jason Furman and Betsey Stevenson, two economists who sit on the President’s economic advisory council, the short (five-page) document doesn’t mince words in making a powerful case in favor of the Department of Labor’s soon-to-be-announced recommendations for stronger limitations on conflicts of interest for advice on retirement accounts. Here are the highlights of what they wrote: 

  • “The memo lays out the evidence that (i) consumer protections for investment advice in the retail and small plan markets are inadequate and (ii) the current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year.” 
  • “Studies generally find that investors using financial advisors pay excess fees and that their returns are lower than what they otherwise would be both before and after fees… …quite conservative, estimates of the cost of conflict suggest 50 to 100 basis points of underperformance per year, or [investor] losses of roughly $8 billion to $17 billion per year. 
  • Loads encourage advisers to excessively churn their clients’ investments. Research suggests that load payments lead advisers to churn, that is, repeatedly buy and sell assets when additional transactions are unnecessary, and to exhibit poor market timing”.”
  • Potentially because of the need to justify the high fees they collect, brokers tend to encourage their clients to invest in actively managed funds that underperform passively managed funds, funds with high past returns, and/or funds with higher-than-average exposure to several forms of market risk.” 
  • Advisors steer investors into variable annuities or other complex products with high fees. Advisers can exploit their clients’ low levels of financial literacy by recommending riskier and more complex investments: a strategy that makes it easier to mask underperformance.” 

Tough stuff, indeed.

Yet this isn’t anything new, and has been reported piecemeal over the past decade, with no discernible impact on the public’s perceptions of Wall Street, as far I’ve been able to tell. But that was before the securities industry inexplicably decided to turn this “problem” into a catastrophe.

Instead of employing their usual (and very successful) tactic of co-opting the opposition’s argument with an imminently reasonable sounding (albeit groundless) response (such as: “While we believe those estimates are misleadingly high, we are committed to the highest standards of investor protections, and feel the DOL’s proposal falls far short of that mark…” or something smilar), the industry responded like a kid who had just been caught with his hand in the cookie jar. 

Andy Blocker, executive VP of policy and advocacy at the Securities Industry and Financial Markets Association, responded: “The memo doesn’t mention anything regarding the impact of a rule change on how people get their financial help…80% of people choose to put their money in a brokerage account.”

Meaning what? That if people are so dumb as to let us rip them off, it’s their fault?

Or as Bloomberg News’ Robert Schmidt reported, Francis Creighton, the head of government affairs at the Financial Services Roundtable, said: “It’s really stunning that this is the view that the administration, at the very highest levels, has of an entire industry.” And Kenneth Bentsen, CEO of SIFMA: “If [the DOL] goes the way of the Furman memorandum and impugns the integrity of an entire sector of the economy in order to push this rule on specious facts, I imagine this gets very public, very fast.” Not that they aren’t ripping people off, mind you, but the Administration is extremely rude to point it out?

This kind of defensive kneejerk reaction (that the securities industry has until now masterfully avoided) is exactly the kind of blood-in-the-water story that attracts the mainstream media. And it certainly has in this case. A quick look on Google reveals this sampling of the media coverage: 

  • Darrell Delamaide’s White House Acts to Protect Retirement Savings in USA TODAYon Jan. 27

    “The White House appears ready to back a revolutionary idea — financial advisers for retirement accounts must put their clients’ interest first. A no-brainer, you might think, and yet a new regulation requiring advisers to do just that has been languishing in limbo for nearly five years as the industry lobbies fiercely against it

    John Wasik’s blog Is Your Broker Double Crossing You?” in on Jan. 28

    “Here’s how this ongoing bamboozlement works: When you retire, you get a lump sum from your 401(k). A broker talks you into transferring the money into an Individual Retirement Account (IRA) offered by the brokerage house, then steers you into expensive investments, which scramble your nest egg. All of this, mind you, is perfectly legal. Since brokers don’t have to be fiduciaries (legally obligated to give you the best advice for your financial interests), they can route your money into products that are going to make them money and erode your retirement savings.” 

  • Barbara Roper’s Financial Firms Fight to Protect their Right to Profit at Customers’ Expense,” on AOL’sHuffington Post on Feb. 2

    “Ever since the Department of Labor proposed several years ago to close regulatory loopholes that allow financial firms to offer conflicted retirement advice without having to act in the best interests of the retirement savers who rely on that advice, financial services firms have been nearly apoplectic in their opposition. This is hardly surprising. There is big money at stake, particularly if the rules end up covering recommendations regarding rollovers from 401(k) plans to Individual Retirement Accounts (IRAs).” 

    Until now the securities industry has done a masterful job of deflecting initiatives to force its member firms to act in the best interests of their clients.

    It’s just possible that this time it—ironically, due to its own efforts—really might be different.


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