John Lefferts' Blog

Friday, June 19, 2009

Let the games begin!

With the financial services firms fighting for survival in the Fall of '08 (some survived-too many didn't), it seems like they all went into hibernation during the winter months of this year. We've been waiting to see what the new rules of the business would be in the form of new and hopefully improved regulations. Well, the Obama administration came out with its' plan this week...let the games begin!

Change has an interesting and defining effect on people and organizations. Many firms will take the stance as being victims taking their time blaming whoever/whatever for the condition they're in. Some will stay the course in hopes that business will get back to normal -a head in the sand approach. But a select few will take control and view the change as a stimulus to anticipate, adapt and seize the opportunity. We are in a defining time for the retail financial services business. A favorite quote of mine states "The future belongs to people who see possibilities before they become obvious". Well, now is the time to look for the possibilities.

There will be winners and losers out of the Financial Regulatory Reform. That is unfortunate, but simply a fact of life. As I read through the 88 page outline on reform, I expected to see a lot of misguided political partisan rhetoric from people who simply don't get it. But instead, I found myself thinking as I went through it, these guys DO get it: it's all about the consumer.

While there are multiple proposed items that will effect the industry, there is one above all that will have the greatest material impact on the business models going forward. It is buried near the end of the 88 page document, but it's impact and meaning for the business is HUGE. It says,

2. The SEC should be given new tools to promote fair treatment of investors.
We propose the following initiatives to empower the SEC to increase fairness for

Establish a fiduciary duty for broker-dealers offering investment advice and harmonize
the regulation of investment advisers and broker-dealers.
Retail investors face a large array of investment products and often turn to financial
intermediaries – whether investment advisors or brokers-dealers – to help them manage
their investments. However, investment advisers and broker-dealers are regulated under
different statutory and regulatory frameworks, even though the services they provide
often are virtually identical from a retail investor’s perspective.
Retail investors are often confused about the differences between investment advisers and
broker-dealers. Meanwhile, the distinction is no longer meaningful between a
disinterested investment advisor and a broker who acts as an agent for an investor; the
current laws and regulations are based on antiquated distinctions between the two types
of financial professionals that date back to the early 20th century. Brokers are allowed to
give “incidental advice” in the course of their business, and yet retail investors rely on a
trusted relationship that is often not matched by the legal responsibility of the securities
broker. In general, a broker-dealer’s relationship with a customer is not legally a
fiduciary relationship, while an investment adviser is legally its customer’s fiduciary.
From the vantage point of the retail customer, however, an investment adviser and a
broker-dealer providing “incidental advice” appear in all respects identical. In the retail
context, the legal distinction between the two is no longer meaningful. Retail customers
repose the same degree of trust in their brokers as they do in investment advisers, but the
legal responsibilities of the intermediaries may not be the same
The SEC should be permitted to align duties for intermediaries across financial products.
Standards of care for all broker-dealers when providing investment advice about
securities to retail investors should be raised to the fiduciary standard to align the legal
framework with investment advisers. In addition, the SEC should be empowered to
examine and ban forms of compensation that encourage intermediaries to put investors
into products that are profitable to the intermediary, but are not in the investors’ best
New legislation should bolster investor protections and bring important consistency to the
regulation of these two types of financial professionals by:
• requiring that broker-dealers who provide investment advice about securities to
investors have the same fiduciary obligations as registered investment advisers;
• providing simple and clear disclosure to investors regarding the scope of the terms
of their relationships with investment professionals; and
• prohibiting certain conflict of interests and sales practices that are contrary to the
interests of investors.

I found myself saying after reading this piece, "Yes!-finally!"

Now we know the framework of the new rules of the game. It's time to move out of hibernation and now that summer is here, get out and make things happen. Much will be written about what this Fiduciary standard will mean, one I found of interest was written last month in Invetment News (link here:

Let's hear it for those who see the possibilities!

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