Over the next few weeks, we’re likely to see movement on the adoption of revised professional standards for the purveyors of financial advice.
Public opinion — and reason — clearly come out on the side of making the fiduciary standard the guiding principle for everyone who delivers investment advice. Under such a standard, of course, an adviser is supposed to act solely as a client’s agent and put the client’s interests first at all times.
The sellers and manufacturers of financial products, quite naturally, prefer, and have long supported, a suitability standard. Under that umbrella, the providers of products and advice (whether known as brokers, representatives, financial consultants, financial advisers or any other title that connotes investment advice-giving) must recommend only those products that are suitable for a client, based on his or her goals and circumstances.
The bottom line regarding standards, of course, is the bottom line. Wall Street wants to keep the suitability standard as long as it can, because it permits principal trades. If a brokerage firm can sell a bond from its inventory when a client comes in to buy, it’s a lot more profitable for the firm than having to shop the order among other dealers to get the best price. Remember, so long as the bond or any other product is suitable for the investor, and the price is within an acceptable range — not necessarily the best price obtainable — the brokerage firm is in the clear. There’s a lot of money to be made by the brokerage business by putting the broker-dealer ahead of the investor.
All of the current dancing around, trying to develop a modified fiduciary standard or permitting the continuation of the so-called Merrill Lynch exclusion — which allows principal trades by fiduciaries under certain circumstances — makes me angry.
The rules should be crystal clear: If you are licensed to give financial advice in any way, shape or form, you must put clients’ interests first. If brokerage firms can’t comply, let them reorganize themselves or label their advice as sales promotion — and not in two-point type buried in an incomprehensible statement.
The fate of this issue rests with the chairman and commissioners of the Securities and Exchange Commission: Mary L. Schapiro, Kathleen L. Casey, Elisse B. Walter, Luis A. Aguilar and Troy A. Paredes. They are all knowledgeable and highly intelligent. So is Richard G. Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc. of Washington and New York.
I’m probably being presumptuous and offensive, but the issue of fiduciary standards should be an ethical no-brainer for these people — if they really place the needs of individual investors ahead of the industry they regulate.
Lobbyists for Wall Street can sing the praises of a suitability standard, or a modified suitability standard, or a Swiss cheese fiduciary standard all they want. But if regulators don’t see that a plain-English fiduciary standard is better for investors than a suitability standard, they don’t deserve to hold their jobs.