By Cyril Tuohy
For the Institute of the Fiduciary Standard, its “Fiduciary September” event was one to remember, based on its notable speakers' consistent admissions that fiduciary advocates are losing the battle of attrition in the advice wars.
Knut A. Rostad, president of the Institute, said fiduciary advocates had “simply fallen short” in terms of making their case beyond The Beltway to a wider audience. Rostad warned of “threatening clouds” gathering in the vacuum created when fiduciary advocates come up short. Advocates for the fiduciary standard let the “lobbyists for the brokerage side” dictate terms of the debate, he said.
“That's where I see some of the threatening clouds out there in terms of, so far, not a concerted effort to create a conversation that is on our terms and not on the terms of the lobbyists for the brokerage side,” Rostad said.
Are fiduciary standards imperiled by brokerage sales tactics bleeding into the world of the fiduciary? Or have brokers, who operate under a suitability standard of care, simply been more adept at presenting their case?
Broker and advisor groups have pitched lawmakers on the importance of preserving choice, freedom, accessibility and affordability of financial services for middle-market clients — those investors who are ready to set aside $50 or $100 a month in an investment account.
Fee-only advisors who charge $2,500 or $3,000 before taking on a client are out of reach for many Main Street investors.
“There are certain levels of investment that are not in the best interest of Main Street investors,” Juli McNeely, president of the National Association of Insurance and Financial Advisors, said in an interview with InsuranceNewsNet.
“Between 70 and 80 percent of my clients would not be candidates for a fee-based type of plan simply because it's not the asset size that is needed,” said McNeely, owner and president of McNeely Financial Services in Wausau, Wis.
In another way, though, broker-dealers appear to have a more evolved position with regard to fiduciary care than the fiduciary advocates themselves.
John Taft, chief executive officer of RBC Wealth Management-U.S. and former chairman of the Securities Industry and Financial Markets Association (SIFMA), said fiduciary advocates are stuck.
Taft, a former municipal bond dealer, said fiduciary advocates are wedded to a position of imposing the “one-size-fits-all investment advisory fiduciary protocol” on brokerage activities as it is outlined in the Investment Advisers Act of 1940, and it doesn’t work.
“It’s a nonstarter and that’s where you guys are stuck,” he said in response to Rostad during a panel discussion earlier this month. “You won’t move off that position.”
Taft helped articulate SIFMA’s current position: It backs fiduciary standards of conduct for brokers but not in the way called for under the Investment Advisers Act of 1940, which governs the behavior of Securities and Exchange Commission-registered investment advisors.
Under the laws governing brokers' operations, Taft said, his financial advisors — who operate within the legal shell of a broker/dealer — are allowed to buy bonds from the broker/dealer side, acting as principal in the trade. That activity would be prohibited under the fiduciary standard outlined in the Investment Advisers Act of 1940.
“Does that mean that my broker has just taken off the white hat of acting in my interest and put on a black hat where they are looking to screw me on a trade they just made in my bond portfolio?” Taft said.
In the same vein, Taft marveled at how wedded fiduciary advocates are to the no-conflict standard, when, in fact, the fiduciary standard is one “in which conflicts are disclosed and they are not acted upon unless the client accepts and waives the conflict.”
Financial services organizations opposed to uniform fiduciary standards say broker/dealers and broker/advisors don’t need the standards of the 1940 Investment Advisers Act shoved down their throats.
What brokers need instead is for Congress to develop a new legal framework anchored in the value and the service that broker/advisors provide under the duty of care to which they are already legally bound by the Financial Industry Regulatory Authority, lobbyists for the financial services organizations say.
Compared with fiduciary advocates, brokers have a more evolved position and much has happened in favor of brokers because of it.
Winds that were once measured in gusts of support for a fiduciary standard in the wake of the passage of the Dodd-Frank Act appear to have died down.
Two of five commissioners on the Securities and Exchange Commission have come out publicly saying they see no need for a uniform fiduciary standard governing registered investment advisors and broker/dealers.
Earlier this year, the U.S. Department of Labor delayed — yet again — its fiduciary standard of care rules pertaining to Employee Retirement Income Security Act plans.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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