Memo: to all owners of independent RIAs, CEOs of broker-dealers of all sizes, SIFMA president and CEO Ken Bensen, and FSI CEO Dale Brown. 

Subject: If you haven’t read Jane Wollman Rusoff’s June 9 interview with Ric Edelman on ThinkAdvisor, read it; study it; memorize it. 

Summary: This is how all savvy financial services executives should respond to questions about the DOL’s new best interest standard—and any questions about a fiduciary duty to clients. 

Ric Edelman, as most readers probably know, is the executive chairman and founder of Edelman Financial Services, a Tysons Corners, Virginia RIA and financial planning firm with 125 planners in 42 offices serving more than 30,000 clients with some $16 billion in AUM. Originally a mutual fund sales firm, Edelman was one of the early adopters of the modern mega-RIA AUM business model, and grew his firm into one of the largest in the country.

In Wollman Rusoff’s interview, he’s critical of the brokerage industry for not having the foresight to embrace this new business model, too. In response to Jane’s question about various factions of the financial services industry filling lawsuits to stop the DOL’s rules, Edelman replied: “The industry has already lost; in the court of public opinion. By launching these lawsuits, the industry has declared that it does not want to be required to serve the best interests of the consumers who buy the products it manufactures. It has declared that it wants to continue selling the high-commission, risky, illiquid investments that enrich it and its sales reps; at the expense of hard-working Americans…” 

Then he went on to add: “The only result the industry will experience from its continued self-serving demands is increased animosity from the investing public, followed by the very increased legislation and regulation the industry seeks to avoid…I am appalled by the industry’s position, behavior and tactics regarding this issue.” 

This element of the securities industry’s opposition to a fiduciary standard for brokers has baffled me since the debate began with the passage of the Dodd-Frank Act in 2010. To sum up the reasons the industry offers for its opposition: that it will cost BDs so much to put their clients’ interests first; they won’t be able to serve most of their existing clients, and many BDs may even go out of business!

Now, I’m not saying that there isn’t an element of truth in that statement: depending on how egregiously their brokers have treated their clients, some BDs may take a substantial hit to revenues under a fiduciary or best interest standard. 

Edelman acknowledges this possibility: “Entire brokerage firms may see a dramatic reduction in revenue as high-commissioned products are no longer being sold to the degree they once were… … Many firms will go out of business. Many will be replaced by brand-new companies with entirely new business models created and designed to succeed in the new regulatory environment, where the older companies couldn’t operate.”

Yet what continues to baffle me is the securities industry’s open acknowledgement of this reality. Isn’t this the same as a surgeon arguing that if she only operated on patients who really needed operations, she could keep her office doors open? (I’m not saying there might not be doctors who perform unnecessary procedures: I’m just saying they aren’t dumb enough to admit it.)

Seems to me SIFMA and FSI were on firmer ground when they countered that, in fact, their brokers are already acting in their clients’ best interests. For one thing, some of them undoubtedly are. For another, proving that they really aren’t is often tricky, especially considering the lack of evidence available from mandatory closed-door arbitration hearings. What’s more, the details of whether the risk/reward/cost parameters of one investment vehicle vs. another quickly makes most peoples’ eyes glaze over. 

Edelman deftly avoids that trap. Instead, he emphasizes the positives, to consumers, to the industry and to his own firm: “There will be an increase in fee-based; but I’m not convinced that fees will rise [overall]. The market will control that. An increase in fee-based business doesn’t necessarily translate into a cost increase.” 

For the industry as whole: “It will help weed out the bad players; people selling products because they make a lot of money without any regard to what’s best for the customer. Those who are left will be the type who want [only] to provide advice. This will result in an improvement in the industry’s reputation, which currently is terrible. As its reputation improves, the industry’s profits will rise. So for the most part, [the rule] is great news for the industry long-term.”

As for Edelman Financial Services,“The nice benefit is that we’re busy recruiting advisors into our practice because many are going to be struggling with complying with the new rules in working with clients, and we’ve already established ourselves as a successful [client-centered] RIA.”

And that folks, is how it’s done: talk about how the new best interest rules fit nicely with your existing business model, and your resulting optimism for the future. And if the rules really don’t fit, as is the case with BDs (if SIFMA and FSI are to be believed), quickly and quietly work to transform your business into one that fits the best interest standard, just as Ric Edelman did.

Read Jane Wollman Rusoff’s complete interview with Ric Edelman: Ric Edelman: DOL Rule Will Kill Off Half of All Advisors, Gouge Wirehouses