The DOL fiduciary rule implementation has been delayed. While consumer advocates applauded the new oversight, very few within the wealth management industry felt the regulation was anything but awkward and clunky. Fewer still believe that nonretirement accounts should have a different, lesser standard of care than retirement accounts.
The debate brought the fiduciary vs. suitability discussion to a head. Indeed,
InvestmentNews has reported that the Securities and Exchange Commission, under Chairman Jay Clayton, is close to a fiduciary standard regulation that would encompass all investment accounts in the wealth management industry, not just the retirement accounts which were affected by the DOL fiduciary rule.
Can both brokers and registered investment advisers recognize each other's strengths and weaknesses so that the public gains the benefits of both protection and choice?
To the RIAs: While you denigrate the brokerage industry with a "salesmen" label, you need to recognize that the RIA world has its share of
charlatans and crooks. Try to educate the regulators on ways they should be teaching clients how to tell the difference between a true fiduciary and a fraud. The answer is not as simple as paying a fee instead of a commission. The crooks in your world pretend to be fiduciaries and use your standard as a license to steal.
It would also be a tremendous step forward to recognize that commissions do have a place, sometimes, in a fiduciary world. For example, I know many true fiduciary advisers who also, under a different regulatory "hat," sell life insurance to their advisory clients. While life insurance salespeople commonly suffer the same reputational burden as car salesmen, the fact remains that insurance is often essential to a comprehensive financial plan. In addition, clients often prefer to buy securities on a commission basis. In many situations it is cheaper for the client. For example, in a very low interest rate environment, charging a fee for bonds is almost usury.
The vast majority of practitioners within brokerage firms also care passionately about the financial well-being of their clients. These advisers wholly support a pragmatic fiduciary standard. My suggestions:
• Stop defending the ridiculous argument that you do not have the responsibility to always act in the best interest of a client. Defending the "suitability" standard is just silly. Saying it aloud is laughable. No leader in the brokerage industry would ever use an attorney or accountant whose work was only required to be "suitable."
• Start being transparent about how you earn your money. When I am speaking to an adviser in the brokerage industry and they bemoan the increased regulatory scrutiny, I remind them of all the times the mainstream wealth management industry has been caught ripping off clients. So before the next scandal, how about proactively identifying the conflicts of interest that still exist in your world. Do some mutual fund companies pay you soft dollars (sponsoring conferences, sponsoring trips) to have access to your advisers? Do you add points to your bonds, making the product more expensive? When you issue a closed-end fund at $10 per share with no commissions, is the portfolio truly worth $10 per share or is the commission built into the price? What are ALL of the components of your "wrap fees" and are you disclosing them transparently to all of your clients?
• Teach regulators how some clients prefer a commission model for certain types of transactions and accounts. Paying a commission does not have to be mutually exclusive from acting in a client's best interest. Show the regulators how this is possible and how often it actually happens. Help them find and exterminate the true cockroaches in the brokerage industry who are in the business of ripping off clients. The mainstream wealth management brokerage firms are technically in the same business as the cockroach firms with regulatory records as thick as the DOL fiduciary rule itself. Those firms whose entire business is selling high-commissioned products with ridiculous promises of returns and safety feed the stereotype of a broker preying on unsuspecting clients. Help regulators find them. They are often the firms that hire those who have been terminated from the mainstream firms who cannot find jobs anywhere else. They are NOT in the same business as you are; stop aligning yourselves with them for lobbying purposes and help regulators put these firms out of business.
• Some of the least ethical practitioners are still within your own firms. Get rid of them. The big wealth management brokerage firms are guilty again and again of protecting big producers who are unethical but still have their jobs because they generate big profits. In a fiduciary world, they present a bigger risk than ever before.
The wealth management industry has changed dramatically since the Investment Advisers Act of 1940 was enacted. Let's not treat its details as if it were the Ten Commandments. By the same token, the fiduciary train has left the station and has reached the mainstream of public discussion and awareness. Brokerage firms that fight the trend will be under increased regulatory scrutiny. Fight for your clients' right to choose how they pay you while acknowledging your ethical obligation to put their interests above your own.
Danny Sarch is the founder and owner of Leitner Sarch Consultants, a wealth management recruiting firm based in White Plains, N.Y.
