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April 02, 2015 at 08:00 PM
The Institute for the Fiduciary Standard called for public and industry comment in a January white paper outlining 11 best practices for advisors and brokers who provide advice to clients. What follows is an open comment letter that I sent to the Institute in March.
Gentlemen and Lady,
First, let me thank you for all your time and hard work drafting this proposal. The current debate, launched by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, over a fiduciary standard for securities brokers is, in my view, the most important consumer protection issue in America today. Originally initiated by the stock market crash of 1929, discussions about a broker fiduciary standard raged over most of the following decade, only to be thwarted by the resulting Investment Adviser Act of 1940 with the inclusion of the so-called “broker exemption.”
The debate has continued over the intervening 65 years, with the brokerage industry largely succeeding in defeating repeated attempts to legally require brokers to act as fiduciaries for their clients. Notable exceptions are the passage of the Employee Retirement Income Security Act in 1974 and the Financial Planning Association’s unlikely victory in federal court in preventing the SEC from extending the “broker exemption” to managed assets in 2007. This debate, reignited by Dodd-Frank, has been largely stonewalled at the SEC by the brokerage industry, but is still alive at the Department of Labor in the form of extending ERISA protections to IRA investors. Despite staunch backing from the White House, including President Barack Obama himself, I have to admit to being skeptical about a favorable outcome.
History shows us that occasionally the courts exhibit enough gumption to stand up to the combined might of the financial services industry. Congress does once in a blue moon, and regulators do almost never—which doesn’t bode well for the DOL initiative. However, politicians, regulators and even the securities industry itself are responsive to overwhelming media and public sentiment, such as in the 1990s when the “fee-only” asset management movement caught the attention of the financial media and transformed the brokerage business. Granted, the securities industry was prevented from co-opting the asset management business only by the FPA’s lawsuit and managed to avoid a complete transformation by inventing the “fee-based” status for brokers, enabling them to be “part-time” fiduciaries without drawing client attention to that fact. Still, the entire episode illustrates that the securities industry can be induced to adopt more client-centered business models (albeit kicking and screaming) and, to my mind, represents a major step toward a media- and consumer-driven transformation of that industry to “fiduciary-only” advice.
This brings me to the work of the Institute for the Fiduciary Standard and your proposal. It’s my belief that these combined efforts represent the beginning of the second step toward this transformation of the retail brokerage business: Increasing public awareness of the fact that retail brokers do not have a duty to put the interests of their clients ahead of their own or their firm’s at all times. As you wrote in your proposal: “Today, a wide range of financial professionals serve investors in a dynamic and complex marketplace. ‘Best Practices’ are designed to assist investors in evaluating and selecting investment advisors and wealth managers from among these diverse professionals. Investors seek guidance that is objective, transparent and understandable. Best Practices, crafted to be concrete, verifiable and understandable, exist to assist them in doing so.”
