In the past few months, the phrase “fiduciary standard” has migrated from trade publications to business weeklies to – yesterday – the front of the business section of the New York Times.
An article in the paper highlighted the difference between the image that wirehouses seek to project in advertisements, and the reality.
It also posed the twin questions of whether a fiduciary standard that applies to all investment advice would help bring reality in line with illusion, and whether that standard has any chance, politically.
In short, the story seemed to be all that any advocate for the existing fiduciary standard that RIAs now operate under could hope. The Committee for the Fiduciary Standard, an advocacy group formed last year, e-mailed it to its 700-plus members. Still, Ron Rhoades has his doubts whether even the nation’s most potent newspaper can make a dent on the fiduciary issue against the political steamroller in Washington. To read his reaction,click:Why the New York Times fiduciary article won’t deter the special interests in Washington
In the NYT article, Trusted Adviser or Stock Pusher? Finance Bill May Not Settle It seemed no question of what was better for the consumer: the fiduciary standard, which requires advisors to act in the best interest of their clients, and the lesser suitability standard that brokers now operate under.
Mere stock pushers
“You have probably seen the television commercial,” writes Tara Siegel Bernard, “the one where you seem to be watching an intimate conversation between family members. But at the end, you learn that the conversation was actually between a broker and his client.
“The advertisement is meant to evoke the idea of financial adviser as confidant, and is part of brokerage firms’ broader effort in recent years to recast their image — from mere stock pushers to trustworthy advisers.
But in interviews, former and current brokers said the ad told only part of the story. All said their jobs depended less on giving advice and more on closing sales. The more money they brought in, the more they, and their firms, would earn.”
Who, on reading the story, would question that the fiduciary standard is better for consumers than the suitability standard? The article even lays out the first hard numbers that have been seen on how much money the wirehouses stand to lose by adopting the fiduciary standard: 6-7% of earnings.
Real battle
Yet, the article gives no hint over the real battle going on behind the scenes. The question is not whether there will be a fiduciary standard that applies to brokers. The question is how the fiduciary standard will be defined by legislation or regulation. Advocates of the fiduciary standard as defined by the Investment Advisor Act worry that the securities industry and the insurance industry has successfully co-opted the language of the debate.
“There is almost no one out there that is not embracing the fiduciary standard,” says Blaine Aikin, president of Fiduciary 360, a Pittsburgh-based company that offers fiduciary training. “In reality, we know that is not the case.”
He notes that some organizations speak of “a fiduciary standard” instead of “the fiduciary standard.”
Aikin says he doesn’t take a statement about he fiduciary standard at face value. Rather, he asks whether a person or organizations embraces the principals behind the existing standard. The five principles are listed here: http://www.thefiduciarystandard.org/
![Marty Bicknell: There will absolutely be more deals [this year].](http://images5.riabiz.com/i/5024377/t "Marty Bicknell: There will absolutely be more deals [this year]."){kind=small}
RJ Ellis added: (Friday 3.5.10 6:32a.m. PST)
“But in interviews, former and current brokers said the ad told only part of the story. All said their jobs depended less on giving advice and more on closing sales. The more money they brought in, the more they, and their firms, would earn.”
How is this different in the RIA or Trust world where fees are based on AuM. At least in the trust world, advisors are paid salaries and not taking home the AuM.
Stephen Winks added: (Friday 3.5.10 7:53a.m. PST)
The brokerage industry will forgo fiduciary standing because it requires accountability and transparency for every recommendation every broker makes. The processes, technology, functional division of labor, statutory documentation, conflict of interest management and advisory services support necessary to safely bring fiduciary standing within the reach of every advisor and consumer is simply not in place. This renders todays existing brokerage support infrastructure obsolete.
By treating trade execution as a cost center rather than a profit center, by eliminating securities lending, by eliminating free use of the client’s capital between trade execution and settlement, significant brokerage revenue sources which are in violation of fiduciary standing would have to be forgone. Thus it is not likely brokerage firms will empower or allow their brokers to act in a fiduciary capacity.
The solution is neither expensive or complex to execute. Assuming the broker is properly resourced with the enabling processes, technology, functional division of labor, statutory documentation, conflict of interest management, advisory sevices support, which would safely bring easily executed and managed fiduciary standing within the reach of every advisor, it is actually just as easy for brokers to fulfill their fiduciary obligations than not. Thus, given the cultural push back from the brokerage industry to support the fiduciary standing of the broker, given there is a definitive understanding of how large scale institutionalized support for fiduciary standing can be achieved which will safely bring fiduciary standing within the reach of every advisor, all the industry needs is market leadership, which is in short supply.
The broker is at the mercy of the firms they work for as to the level of counsel they provide. The answer must be a free market solution from next generation advisory services firms that have everything to gain and nothing to lose. Given a freemarket alternative, the broker has the option to choose to act in client’s best interests or in that of their supporting brokerage or custody firm. We know what the consumer prefers.
We are not there yet, but it is comming.
SCW