Wall Street Journal editors performed a public service when they set out their case against the fiduciary standard recently. The editorial shines a bright light on arguments against the fiduciary standard that the brokerage industry, understandably, tries to keep under wraps.
This Journal editorial is part of a raging battle in Washington between brokerage lobbyists and, well, most everyone else, over whether securities and insurance sales brokers should be regulated as professionals—like doctors—when they give advice. Or whether they should continue being regulated, as they are today, more like car salesmen. Brokerage lobbyists are fighting efforts to raise broker standards. They like being regulated like car salesmen.
The editorial exposes the thinking and assumptions behind the anti-fiduciary campaign and nice-sounding words like “choice” and “business model neutrality.” The thinking that allows one to conclude, as Journal editors do, that serving investors’ best interests is bad for investors.
Here is a recap of five central points in the editorial:
1. “Brokers are already heavily regulated by the SEC which imposes myriad rules to prevent fraud, ensure that fees are disclosed and protect clients from “unsuitable” investments.”
Wrong. Brokers are ineffectively regulated. Opacity of fees and conflicts and “unsuitable” investment recommendations permeate the industry.
2. “Mr. Obama is making his usual argument that consumers are helpless against the predations of business people. The solution naturally involves lawyers making lots of money. And in order to avoid industry wide chaos, the Washington bureaucracy will issue a flood of exemptions.”
Partly wrong. Unsubstantiated claims of industry “chaos” that would result from fiduciary duties are just that. But if we presumed for just a moment there were a smidgeon of evidence behind the claim, then think about this. The brokerage industry today screams from the mountaintops to suggest brokers routinely provide fiduciary care. This means one of two things. Either these routine suggestions are presumptively misleading or fraudulent, or alternatively, the claims of “chaos” are hyperbole. Or both are true.
Yet the editorial correctly notes that exemptions are inherently problematic. (However, the editorial fails to note the very exemptions it castigates exist primarily to appease brokerage firms.) The editors should argue against the exemptions and the crony capitalism they represent.