Jeff Spears Reveals the 'Zero Sum Game:' The Weekend Interview

JS: My hope is that the incredible conflict of dual registration, in essence, goes away. So you're going to have to be fish or fowl. It looks like that's where it's going.

It's eerily similar to Gramm-Leach-Bliley–[which was] only applicable to a few firms in the wealth management space. [At] Bank of America–where I was–it was very applicable. In Gramm-Leach-Bliley you had to disclose yourself to the client as, "I'm either a fiduciary or a broker," when you went out and talked to them. And you had the dual-sided card or whatever. My experience was that might work well on paper–but it was an incredibly confusing discussion with the client.

WM: And the evolution has been for banks to go broker–not to stay fiduciary–except for the trust department, right? And clients have been totally lost, don't get that evolution?

JS: Right. The firsthand experience I had with clients around this issue was the response of:

"Wait a second, aren't you always acting in my best interest?" Well, not when I turn my card over.

WM: That's real clear.

JS: Nevertheless, if you're the client, it's, "Well, why are we going through this dance here? I'm going to make it very clear: I want you to take care of me."

WM: And, of course, a big part of that has been the evolution of titles–from stockbroker or registered rep. or investment advisor, to everybody being a financial advisor or some kind of counselor or consultant?

JS: Exactly right. It totally obfuscates the issue; and the client–it gets down to trust, right? They've got to get down to a level of trust with their advisor–whatever we're going to call the person, and the advisor has to comfort them, sometimes, that they're protecting them from their firm–which–why do you even have that? Let's just legislate it so that it's black and white.

WM: A study by the Committee for the Fiduciary Standard (of which I am a member), and SEI found that the majority of brokers want to put their clients' interests first. But when they do that they have to do it on the sly because their legal obligation is to their firm.

JS: I agree with you–they are out there. There are a lot more ethical people than unethical people; unfortunately the unethical people really [make it tough] for the rest of us. Those ethical people would love the protection of tighter regulations, I believe. When I say tighter I mean better defined.

WM: If you're following a fiduciary process, wouldn't it follow that your liability is decreased because you are following that process? If you've taken the time to learn the process, and the principles?

JS: Yes.

WM: Obviously there might be people that might not want to do that, and of course they could stay on the sales side, be titled as such, work on distribution and that would be a different thing–but then they shouldn't be titled as advisors?

JS: I agree and would take it a step further. If there's a person that will stay on the B/D sales side of the business, there's no more collaborative team calling–if I was the broker and you were the fiduciary and we went out to call on a client.

WM: So, I'm the fiduciary introducing you the broker to the client–that client trusts me so they're going to trust you?

JS: It's back to my Gramm-Leach-Bliley experience. People jump to the conclusion, "Well Kate's introducing me to this person, and I trust Kate–so they must be okay." And that person is compensated and has sales goals to do everything that isn't almost trustworthy. And there are huge behind-the-scenes battles between the fiduciary person and the broker.

WM: This is when you were at B of A?

JS: Exactly, and this has gone on. And other professional acquaintances have lived the same dynamic–if they were at U.S. Trust to come into Morgan Stanley to do the team-based approach that we're talking about, and it didn't work. You're either a fiduciary–or you're not. If there's gray area–everyone loses, in my opinion–especially the client.

WM: Do you have a sense from the independent broker/dealers–they're a special case because so many of them don't have their own product but maybe they are getting a payment for having a fund on a platform or something like that?

JS: Exactly!

WM: Do you have a sense what they are going to do about this–so many are dually registered, some are married to–even of they don't have proprietary product–getting this vig from whoever they have on the platform. How do they make a transition to a fiduciary business?

JS: It's going to be tough decision-making. This is a grotesque generality, but I would say that, in the independent space, the dual registration exists for the 12b-1 fee. They couldn't really exist to sell stocks or bonds. It's on ongoing hit. You also read–talk about people finding out–it's saddening to read about when independent wealth managers go after [protest] taking away the 12b-1 fee–I don't see how you can make a credible argument, if you're a fiduciary.

WM: And of course this whole part of the fiduciary [duty] meaning you have to control costs for your clients and disclose the fees–not that you can't have commissions–but you have to disclose all that so, if you're disclosing all of it, then water's going to seek it's own level, right?

JS: It is, and the other side of disclosing all of it is the clients getting comfortable with: "We're going to show you every fee you're paying," which is what a true fiduciary should do. And the clients should be okay with that. However, sometimes there is an element–and maybe it's through the salesmanship of the non-fiduciary–that the client becomes okay with not thinking that they're paying any fees.

WM: Well, not that they're okay with it–that they just don't know–they think that it's cheaper–what they see at a broker/dealer that they're being charged may appear way lower than the revelation of full costs from an RIA firm.

JS: That's right, and there's been my education, aha moment–doing what we're talking about. "Okay we're going to take you from a wrap account; we're an independent RIA. We're going to break down what the money manager charges, what the custodian charges, and then, what I'm charging as your advisor. And the headline number–to your point–looks higher.

WM: Right. But it's the full-cost RIA number–versus the partial-cost number at a B/D.

JS: Exactly! And a partial cost number really doesn't manifest itself until you really look at your returns over a cycle. And then they'll go: "Why am I doing so poorly?" Well, might be, because the fees you didn't see are taking 2% a year out of your return. Because it is a zero-sum game.

Hopefully what will come out of this will shine the light–just like it will on derivatives–on all of these things within the fiduciary side that will allow a client to make a better-informed decision about what all the costs are. Maybe I've gotten idealistic in my old age, but that will be great.

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.