As time has evolved, the picture of what the financial sales and advice landscape will look like is beginning to become more clear. The SEC has been given authority to call the shots on this one. They’ve made it apparent about what they want and barring any unforeseen new epiphany from the study on the issue…that they are conducting…here is how I see it going down. Anyone, be it SEC fee only RIA or FINRA Registered Rep (or both) who gives “Personalized Investment Advice” will be held to a fiduciary standard. Personalized investment advice is anything that is particular to a client and covers any kind of recommendation. And yes, that includes pretty much all the activity of financial sales. Naturally, if brokers and advisors are held to the same singular standard, it stands to reason that the same singular regulator will perform the oversight….and that’s likely to be defaulted to FINRA. This basically rocks the worlds of both RIA’s and B/D’s alike. While the Dodd-Frank bill did say that earning a commission or having a limited product set (aka proprietary products) in and of themselves will not be a violation of a fiduciary standard, as a practical matter, it’s going to be more difficult. (See Investment News article: http://www.investmentnews.com/article/20101017/REG/310179992
Having grown up in the sales side of the business, I’ve often found myself having to defend the honor of those Registered Rep’s/Agents, etc. who have always placed their clients’ interests first above their own. Financial Writer Bob Veres wrote the lead article for Financial Planning Magazine’s 40th anniversary issue this month titled “What’s next for planners” http://www.financial-planning.com/fp_issues/2010_10/whats-next-for-planners-2668883-1.html where he does an outstanding job peeking into the future of the business with input from industry leaders. In his segment of the article about Fiduciary Standard, he quotes me several times and makes the observation “financial services consultant John Lefferts concedes that the fiduciary concept is not in his DNA”. I agree with most of what Bob has to say, but will respectfully differ with him on this one. Yes, those who are paid commission by the sale of a product do have an inherent conflict, particularly those who are representing the product manufacturer in an agent or employee capacity. But it cannot be assumed that even with a conflict, one cannot choose to hold their clients' interests first. Additionally, the principles based RIA heretofore has always held to this standard operating under a “just trust me” level of supervision. Just as I infer that despite the potential conflicts, most registered rep’s do the right thing, I also believe most RIA fee only professionals do the same. What’s going to be different going forward is they’re going to have to prove it through supervision by FINRA, something the majority of this group despise believing they are higher up on the food chain than the lowly salesman. But as a regulator pointed out in a breakout session on the topic, we can’t operate in an environment where we apply regulations to those we think may need them and give all the others a pass. Rules must be applied to everyone uniformly.
I’ve been somewhat conflicted knowing that many of my former brethren want nothing to change and to keep on keep’in on with their suitability standard. In the insurance segment of the industry, it has been observed that after they began requiring compensation disclosure, the agent headcount in the UK went down by 80%. I’m not sure if that translates to the same here in the US, but no question, there will be fallout across the entire financial services industry when this is done. Nonetheless, at the risk of alienating my former colleagues, and a couple of the multiple industry organizations/associations to which I belong, I want to state that I am in full support of a harmonized Fiduciary Standard of care. Here are 3 primary reasons why I see it this way:
1. Whether you sell a product or provide a fee for service, the client should always come first. A fiduciary standard insures this. Yes, there will be a great deal of fallout for the proprietary models, but in the net, the survivors will be those who earn the trust of their clients no matter what their form of compensation or how much they earn. And while I’ve cited that the majority of sales driven professionals should have no problem meeting this standard, the few who give the business a black eye will be very exposed and ultimately forced out. The cream will rise to the top creating a more professional perception of what we do to the outside world.
2. The financial services business is increasingly drifting towards fee based products and services and as such, many of us are “hybrids” as both Registered Rep and RIA’s. But, perhaps the most ridiculous thing is that we have to wear “two hats” advising with one set of rules under the SEC and then taking off that hat and putting on a FINRA hat to make recommendations. It is totally redundant and confusing regulation. And the consumer couldn’t care less so long as their interests come first. Good riddance to one of those hats.
3. While there are exceptions, many of the “fee-only” RIA’s I know left NASD now FINRA to get away from the burdensome, nitpicky regulations and oversight. It’s no wonder they throw a fit when being faced with FINRA back in their world again. But if not FINRA, then who? If, Mr./Ms. RIA, you believe your advice is without conflict and in the clients best interests, then prove it. If, Mr/Ms. Broker, you believe you are worth your sales commission, disclose it to your client why and how you get paid. For the hybrid’s, it will be a welcome change to serve only one master, as overbearing as they may be.
