Did you ever get the haunting feeling that something was going too well? That's how I'm starting to feel about the reregulation of the advisory world, which is part of the Obama Administration's overhaul of the financial services industry. For professional advisors and the rest of us who believe that all advisors should have a fiduciary duty to their clients, so far rapidly moving events have been essentially all good news. First, on June 17, the Administration's White Paper on Financial Reregulation called for "a fiduciary duty for broker/dealers offering investment advice" and "harmonized" regulation of investment advisors and broker/dealers. In mid-July, the Treasury Department followed up with proposed legislation that would empower the SEC to hold brokers to a fiduciary duty to their clients, end commissions for brokers who give investment advice, and require that investment disputes be heard in open court. Cool, huh?
Then on July 29, the Committee for the Fiduciary Standard (comprising advisory industry leaders including Harold Evensky, Roger Gibson, Knut Rostad, Sheryl Garrett, Ron Rog?, fi360′s Blaine Aikin, and Wealth Manager Editor-in-Chief Kate McBride) met separately with SEC Commissioners Elisse Walter and Luis Aguilar, briefed an official from Treasury, and then talked with some Congressional staffers. While Committee members declined to talk specifically about their conversations, they expressed a surprisingly high level of optimism. "Our takeaway was that all participants understand and believe in the application of the five core fiduciary principles to any and all who provide (or purport to provide) investment advice."
Is Something Rotten in the state of Denmark?
So when is good news not good news? Maybe when it's just too good. What we're talking about here is ending commissions and arbitration, and most importantly requiring that brokers and their firms be held liable if they don't act "solely in their client's interest." This reregulation could fundamentally change the retail brokerage industry away from very lucrative product distribution and into more restricted client-oriented advice.
So why aren't we hearing more wailing and gnashing of teeth from Wall Street? I suspect it's because they're too smart for that. They're also masters of picking their battles. They've figured out that now is no time for a frontal assault. With virtually all of the wirehouses shaken to their foundations by the self-inflicted subprime meltdown, and high-profile securities frauds such as Bernie Madoff, Wall Street's capital–both financial and political–is at its lowest point since 1929. So, with the public and the Administration crying out for reform, the brokerage industry finds itself in no position to oppose it.
That doesn't mean they're just going to lie back and take what's coming, however. These guys are far too good, and there's far too much as stake, for that. How are they going to deal with this latest onslaught to business as usual? That's what I've been asking myself lately, and I think we may have a clue in a little publicized article ironically called "The Madoff Opportunity" written for the June issue of Wall Street Lawyer magazine by Legg Mason general counsel Thomas Lemke and securities attorney Steven Stone. It's a masterful piece of work: so high-minded, and reasonable, and compelling, and so completely misleading that it could have been written by the Prince of Darkness himself.
Lemke and Stone based their article on "universal standards" recently proposed by SIFMA. They propose to jump on board the whole "fiduciary duty" thing, and then help the Administration, Congress, and the SEC to "reasonably" implement it: "Though the stars (finally) seem to be aligning for this much-needed reform, a question remains as to whether long-standing competitive distrust, jockeying over legalistic distinctions, and focusing on 'labels' could derail the 'opportunity' for reform…"
Not bad, eh? "We're so behind this rereg that we're concerned industry squabbling will screw it up," they seem to be saying. Just makes you thankful that the brokerage firms are here to help, doesn't it? The article goes on to make one reasonable sounding point after another, culminating in their final goal: "Presumably, however, as this standard is defined, it will build on principles found in the existing broker/dealer regulatory scheme."
Point Counterpoint
If the advisory world is going to have any chance of avoiding the fate of a FINRA "regulatory scheme," it needs to fully understand the seductive, sugar-coated steps that lead us there, and be able to counter them will an equally high-sounding, but more truthful version of reality. Here's how Lemke and Stone made the FINRA/SIFMA/BD case:
#1 This is about business ethics (not professional standards).
"Not unexpectedly, the broker/dealer and investment adviser industries–who are keen competitors in the business world–seem split on the appropriate overarching standard of care, with rhetoric flowing freely from segments on both sides." This is a deceptively clever point, unfortunately made possible by the CFP Board's and the FPA's failure to create a true profession of financial planning. By positioning the debate as a competitive turf war, rather than a professional vs. sales approach, the B/Ds try to take consumer protection out of the conversation.
This allows them to make the logical follow-up:
