Michael Kitces, in an Investment News column, says that a letter to the Securities and Exchange Commission from the CFP Board, Financial Planning Association, Consumer Federation of America and several other groups lays out a “roadmap about how the SEC can proceed with a rulemaking” to impose a universal fiduciary duty on broker-dealers. The letter, he says, represents a turning point in the debate on the issue.
Mr. Kitces writes, “perhaps most significant in the letter was its statement that ‘the fiduciary duty is fully consistent with sales-related business practices, including receipt of transaction-based compensation, sale of proprietary products and sale from a limited menu of products.’”
In truth, the letter by the advocacy groups may not be a turning point so much as an acknowledgement of reality. SEC officials have indicated for months that the commission’s eventual fiduciary duty for broker-dealers and registered reps will be business-model- and compensation-neutral.
This was never really in question, because the Dodd-Frank law plainly says that any new fiduciary standard will allow advisors to receive commissions and offer proprietary products.
Mr. Kitces continues that “the letter suggest that the best path forward is simply to expand the rules framework under the existing Investment Advisers Act.”
However, Barney Frank, himself, cautioned SEC Chairman Mary Schapiro in a letter dated May 31 last year against applying the 1940 act to broker-dealers.
“If Congress intended the SEC to simply copy the ’40 Act and apply it to broker-dealers,” Rep. Frank wrote, “it would have simply repealed the broker-dealer exemption – an approach Congress considered but rejected.”
The SEC needs to consider the real value that broker-dealers and their registered reps provide clients who have no need for or no ability to pay fee-only services. It must consider any unintended consequences that a new regulation would have on the ability of middle-market consumers to receive financial services and products.
NAIFA’s concerns about a fiduciary duty are, and always have been, twofold.
First, no one – not Congress, not the SEC, not the Consumer Federation of America – has given clear, unambiguous evidence that there is a real problem that needs to be addressed by a fiduciary duty for broker-dealers. The “pro-fiduciary” crowd and many in the media have portrayed suitability as a weak or lesser standard.
In fact, broker-dealers and registered reps are some of the most heavily regulated financial professionals on the planet. Every transaction they make is reviewed to ensure its suitability, they undergo frequent regulatory examinations, and they are subject to significant continuing education requirements.
No one has produced a shred of evidence that the services or products offered by fiduciary-bound advisors are somehow “better” than that provided by advisors under the suitability model. Certainly, no one has shown that fiduciary-bound advisors are more honest.
Second, a poorly developed or implemented fiduciary regulation could end up hurting the consumers it is supposed to benefit. If a fiduciary duty increases the regulatory burdens or liability costs for advisors, will these financial professionals still be able to offer affordable products and services to middle-income investors? Even if the SEC’s rule says commissions and proprietary products are ok, will advisors be forced by simple economics and the need to make a living to either drop their securities licenses or shift their business to wealthier clients who can afford to pay higher fees?
Fee-only investment advisers, who often bill themselves as “wealth managers,” tend to cater to more wealthy clients than registered reps. Will lower-end investors be left out in the cold if the ranks of registered reps is diminished by a misconstrued regulation that doesn’t seem to be addressing a specific problem?
In the words of NAIFA President Robert Miller, “We don’t fear a fiduciary duty.” NAIFA members act in their clients’ best interests every day. As it is, they abide by a full course of regulatory checks to do so.
NAIFA encourages the SEC to follow its own roadmap towards any new regulation it decides is necessary. The Commission has announced that it will conduct an analysis to ensure any rule it proposes doesn’t cost consumers more than it benefits them. We are eager to help in any way we are able.