I know this is risky, but it's all a part of the high-wire timing act we call financial journalism, especially the monthly print variety: It looks like that by the time this hits your desk, Congress will still be debating the final version of "The Consumer Protection Act of 2010," or CPA. As you may have heard, the CPA will include the reregulation of brokers and other financial advisors. Hopefully, that makes this a good time to recap events leading up to this point, so you won't be surprised by the final outcome, and you'll have some idea how in the world we got there–and what happened to that level fiduciary playing field that independent advisors have been dreaming about since the 1980s. The fiduciary standard's not dead yet, but for those who are hoping for change, it may be time to start petitioning for divine intervention.
Last Year's News
You may remember that last June, the Obama Administration proposed reforming America's financial system in an 85-page white paper. The Treasury Department recommended (along with many, many other reforms) that: "The SEC should be given new tools to increase fairness for investors by establishing a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisors and broker-dealers." Thus began the biggest debate over financial advisor regulation since the market crash of 1929 led to the Investment Advisor Act of 1940.
This time, in an effort to avoid another 11-year delay in reform, Congress responded with what for it was lighting speed, and in December of 2009 the House of Representatives passed the "Consumer Protection Act of 2009″–and the buck–over to the Senate. Of particular interest to financial advisors, the House's Act contained the "Investor Protection Act of 2009″ which calls for the SEC to create rules for when brokers would have a fiduciary duty to their clients.
The securities industry–in the form of SIFMA and FINRA–quickly grasped the negative political implications of opposing a fiduciary duty for brokers. Instead, they launched a brilliant campaign, which on the one hand extolled the virtues of the fiduciary standard, while at the same time pointing out that the realities of the "real world" required the careful practical application of fiduciary standards to only the appropriate parts of any broker/client relationship.
Reading between the lines and the lines themselves of SIFMA's position revealed a fiduciary standard so watered down as to enable brokerage firms essentially to continue doing business as usual.
To many observers, including this one, the prospect of turning over the creation of a fiduciary standard for brokers to the SEC, which is currently run by former FINRA CEO Mary Schapiro, was not a happy one. After all, it was the SEC that ruled (and then lost in court to the FPA) that the clause in the '40 Investment Advisers Act which currently exempts brokers from having a fiduciary duty to their clients when selling securities should be extended to apply when brokers manage client portfolios. Not exactly the folks you want standing up to Wall Street over clients' best interests.
This Year's News
Skeptical about the prospects of the House bill, independent advisors, consumer advocates, and other proponents of broadening the fiduciary standard turned their hopes toward the Senate: On a bill proposed by Senator Christopher Dodd (D-Connecticut), the now lame-duck chairman of the Senate Banking Committee. Dodd's "Restoring American Financial Stability Act" offered a far more direct solution to the fiduciary challenge set out by the Obama white paper: Simply eliminate the "broker exemption" to the '40 Act. That way, brokers would fall under the same rules–including a fiduciary standard–as everyone else in America who offers investment advice, whether incidental to the sale of securities or not.
But despite intense–and at times, even heroic–efforts by consumer groups, industry associations such as the Investment Adviser Association (IAA), and especially by the Committee for the Fiduciary Standard, led by Knut Rostad, Roger Gibson, Harold Evensky, and Wealth Manager's Kate McBride, the financial services industry prevailed. At the behest of the insurance lobby, Senator Tim Johnson (D-South Dakota), a member of the Banking Committee, introduced an amendment to Dodd's bill that referred its fiduciary provision to the SEC for an "18-month study of the brokerage and investment advisory industries." Goodbye, simple fiduciary standard.
Where was the financial planning "profession" while the fight for a genuine fiduciary standard for all financial advisors was being fought and probably lost? The Financial Planning Coalition, led by the CFP Board, including the FPA and NAPFA, was pursuing its own agenda. While giving lip service to supporting a fiduciary standard (at times the "40 Act standard," other times the "40 Act" without the broker exemption, and still others an undefined "fiduciary duty"), the Coalition used what little influence it has with legislators, regulators, and fiduciary advocacy groups to promote its plan to get federal regulation of financial planners.
An Answer to a Question No One Asked
