Journal of Financial Planning: September 2013
Dan Moisand, CFP®, has been a practicing financial planner since 1991. He is a principal at Moisand Fitzgerald Tamayo LLC in Melbourne, Florida, and former president of FPA.
In the years since Dodd-Frank, no action has been taken to hold brokers accountable to a fiduciary standard. You can be forgiven if you have the impression it is a complicated issue. It ain’t.
The brokerage industry is concerned and has spent considerable effort conveying their angst to Congress, complete with a request for information and comment that was tainted with assumptions slanted in favor of an outcome Wall Street would like.
For instance, how about this assumption the SEC offers to position itself as business model neutral (from its March 1 request for information on the obligations of broker dealers and investment advisers)? “Assume that the uniform fiduciary standard of conduct would be designed to accommodate different business models and fee structures of firms, and would permit broker-dealers to continue to receive commissions… .” They go on to describe disclosure as adequate to demonstrate the fiduciary duty of loyalty.
Herein lies the fundamental problem: regulations are supposed to protect the public, not accommodate business models. And, disclosure has its limits.
Is this a Disclosure?
Let us not forget this blast from the past: “Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salesperson’s compensation, may vary by product and over time.”
That was the paragraph the SEC had brokerages attach to fee-based accounts they wanted exempt from the Investment Advisers Act. FPA’s success in forcing the SEC to vacate the broker-dealer exemption in 2007 ended the proliferation of these accounts, but the paragraph is an excellent microcosm of how our regulatory system fails by putting industry interests ahead of protecting the public.
In one of my criticisms of this paragraph at the time, I pointed out that it could apply to all brokerage accounts, not just the fee-based variety, but I did not call for it to be used elsewhere. I wasn’t going to advocate for such a worthless piece of junk.
I call it a “paragraph” because I have a hard time using the word “disclosure.” A disclosure should give important and meaningful information. So, tell me, when, exactly does the firm’s interest conflict with the client’s? When does the firm get compensated by people other than clients? That is pretty important information.
The most ineffective sentence in the paragraph is “Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest.” Should you have to ask? Isn’t the purpose of a disclosure to disclose those very things?
Curious Legislation
Today, sadly, the public remains confused and not well protected. And earlier this year, a couple of new twists arose.
In June, the House Financial Services Committee sent H.R. 2374: Retail Investor Protection Act to the full House for consideration (I find the name laughable.) If enacted, it would force the Department of Labor to wait until the SEC comes out with its rule before it can proceed with issuing an expansion of the applicability of the fiduciary standard. It also imposes new requirements on the SEC. In a letter to the committee, SEC Chair Mary Jo White wrote that the statutory requirements of proposed legislation could further impede this investor-focused initiative, in what already has been a multi-year process.
Fortunately, it is highly unlikely that H.R. 2374 will become law given the current makeup of Congress, so there is some hope for the public’s interest. Or maybe not.
In March, the Congressional Black Caucus sent a letter to the DOL fearing expansion of the fiduciary requirements to IRAs, claiming that if brokers are held to ERISA’s prohibitions on third-party compensation, they may choose to exit the market rather than risk the potentially severe penalties for violations.
That’s curious. If the brokers are held to high standards or have to be clear about their compensation, they will leave? Think about that for a minute. Why would that be? Don’t they conduct themselves in accordance with high standards now? Their ads and marketing sure imply that they do.
Isn’t the original source of the third-party compensation the client’s funds anyway? Brokerages don’t get the money from Mars; they get it from the companies whose products they sell, who get it from the client.
Try this. Next time you are at a restaurant and see someone plop down cash to pay their bill, walk up to the table with a form for the customer (and the waiter, if present) to sign and say, “Hi. I just wanted you to know I may take some of your money. Please sign here. It is just a standard disclosure that I have informed you I may take some of your money.”
They may laugh and go along with it if they think they are on a hidden camera show, but if you persist and make clear you are serious, there is almost no chance they will sign the form or let you take any money. The tone will change. They may call security.
That is why the brokerage industry has a problem. The value proposition of “We are here to help you, but don’t hold us to that” has no value.
This is a shame. While there are plenty of reps who would fear a bona fide fiduciary standard and the clarity that engenders, thousands of advisers in this conflicted system do help people. They behave as though they are accountable to a fiduciary standard—whether they are or not—because it is good for business and the right thing to do. Meanwhile, the public remains confused and only hears “Be careful. Financial services is full of crooks.”
A Simple Solution
A solution isn’t complicated. Dodd-Frank requires any new SEC rule to impose a fiduciary duty at least as rigorous as what applies to the Advisers Act. Simply enforcing the current Advisers Act would fit the bill. Brokers are supposed to be exempt from the Advisers Act and therefore the fiduciary duties that apply if their advice is “incidental.”
The SEC could go a long way toward ending consumer confusion and protecting the public if they would simply say that holding out with certain titles or offering certain services would presuppose that the advice was not incidental, and the Advisers Act fiduciary duties would apply in all dealings with the client. No hat-switching. “Financial planner,” “wealth manager,” “financial adviser,” “financial planning,” and “wealth management” all spring to mind as good choices.
Individuals and their firms could choose one of these titles and the fiduciary duties that come with it, or they could choose not to use one of these titles. Advice then would be regulated based on how you hold yourself out.
I am aware this approach presents myriad problems. So what? Regulations are supposed to address problems the public faces. Confusion about who is actually held to the high standards advertised may be problem No. 1. If the industry has trouble meeting high standards when advising the public, the industry needs to change, not the standard.