Letter to Schapiro focuses on fiduciary, 12(b)-1 fees

I thought I would share a letter I sent to Securities and Exchange Commission Chairman Mary Schapiro, which was prompted by one of your articles last year.

Dear Ms. Schapiro:

As I was reading the InvestmentNews article “Finra walks fiduciary/ suitability tightrope” (May 18), it gave me pause to reflect on a couple of issues that I think need to be examined further in the industry.

Neil Simon, vice president of government relations for the Investment Adviser Association, was quoted as saying: “Fiduciary is the highest standard recognized under the law. There is far less evidence of investor abuse with the fiduciary standard.”

Part of the reason there is less abuse is that the registered investment advisory industry is able to charge an annual fee or to annuitize their businesses. Therefore, advisers know that there will be cash flow and income to run their practice without having to turn it into a transaction business, which is what the brokerage industry has relied on for years.

My thoughts then gravitated to the issues surrounding 12(b)-1 fees of late, and the talk of trying to legislate them out of existence.

The brokerage industry needs 12(b)-1 fees just as RIAs need their annual fees. It also helps to level out an otherwise up-and-down transaction business.

Take away 12(b)-1 fees and you not only turn the industry upside-down but you subject clients to other billing practices that will, in turn, be confusing to them.

I am writing this letter with hopes that you don’t create massive unintended consequences related to these two issues. I just want to make sure that whoever is trying to change 12(b)-1 fees realizes that the brokerage industry will see a way to get fees out of an account to manage that particular business, as that is how brokers make their living.

In other words, the end customer will pay — and sometimes even more, I would assume — as a case will be made that there was more “work” involved with what “the regulators are now making us do.”

The main reason that RIAs exploded onto the scene in the past 10 years is advisers’ desire not only to annuitize their businesses but also to avoid the onerous oversight that The Financial Industry Regulatory Authority Inc. mandated when they were brokers. Heck, most of them are under state jurisdiction and never see a regulator, so we are going to give the states more jurisdiction?

No wonder the RIA industry is so opposed to potential Finra oversight.

Ms. Schapiro, I know you know what I am talking about. Why don’t you just put your foot down and make it happen?

Finra does a very thorough job overseeing their fold. They should be regulating RIAs.

Let’s not throw the baby out with the bath water just because of a few large bad apples. The system works.

The SEC had its chance at [Bernard] Madoff and blew it. Don’t punish the entire broker-dealer industry just to make a point.

I hope that you would look into these issues concurrently, and not separately, as you continue to analyze the industry.

In conclusion, I have always thought that suitability and fiduciary responsibility fall under the same standard of care when it comes to taking care of client money. I think most investment professionals feel that way.

It appears that now we are going to make an issue of the two words to dictate how we are supervised and regulated. Let’s not get too deep into something we can’t get out of.

Richard K. Bryant

President

Raleigh, N.C.

Capital Investment Cos.

Appreciates look at what reps want from B-Ds

I enjoyed the article “Reps cite top 10 areas of improvement for B-Ds,” which appeared in the Feb. 8 issue.

It is nice to read something that looks at the broker-dealer/representative relationship with a little more depth than simply payout or name.

Too often, financial advisers’ concerns are boiled down to compensation and firm name, so it is refreshing to see someone take the time to look at the bigger picture.

I run a small, independent recruiting firm and work with about 15 broker-dealers, including wirehouses, regionals and independents.

So your article was a nice way to see a broad sample of reps’ perspectives regarding their needs in relation to a current or potential new broker-dealer.

It wasn’t surprising to see transition support high on the list, though seeing broker-dealer reliability, basic operations and responsiveness in the bottom half was certainly surprising.

You learn something new every day.

Again, it is great to see someone take a closer look at what makes advisers tick and to see someone put the effort in to dig deeper than just compensation.

Christian Herbst

President

Jupiter Consultants LLC

West Palm Beach, Fla.

Glass half full for advisers who have their eyes open

You were spot on in the Just Thinking column “A spot of green in a gray environment,” which appeared in the Feb. 1 issue.

I was glad to see you quoting the Bureau of Labor Statistics.

Our recent research tells us that eight of 10 affluent investors have enough dissatisfaction to consider changing financial advisers, and nine of 10 would consider a second opinion on their portfolio if they were presented with a better alternative.

Many veterans are still locked into yesterday’s world, not making the changes for which the affluent are looking.

Yet the financial services industry is hiring a slew of rookies.

However, they need to rethink their mentoring and training programs.

The glass is truly half full for advisers who have their eyes wide open.

Matt Oechsli

President

Oechsli Institute

Greensboro, N.C.

Financial advisers should be dressed appropriately

I read the article “Suit? Khakis? Financial advisers ponder the power of pinstripes” (Feb. 1) with great glee.

I was registered in 1968 and retired almost five years ago.

I worked for a number of large wirehouses and commercial banks, most of which are now out of business, but they included Chemical Bank, E.F. Hutton & Co. Inc., Paine Webber Group Inc. and Manufacturers Hanover Trust Co. All those fine firms required suits and ties.

In 1968, my first bank, Manufacturers Hanover Trust, required that men wear white shirts only.

Some “young toughs” such as myself decided that we would wear blue shirts, and about eight of us showed up on a Monday morning with dark suits, nice ties and blue shirts. The divisional senior vice president called us into a meeting and told us that anyone wearing other than a white shirt “from tomorrow on” would be fired.

So much for the young toughs.

By 1992, another bank I worked for permitted casual business dress Fridays in June, July and August. As the summer wore on, casual business dress became very sloppy dress, and the rule was rescinded.

In 2002, I was working as the sales manager at the securities division of a Wall Street bank. As I returned from Brooks Brothers with my brand-new just-altered suits, everyone in the trading room started to laugh.

While I was away, a memo had been sent around saying that, effective immediately, casual business dress would be accepted. But what began as leather shoes, dress slacks and button-down shirts soon turned into “whatever covers your body.”

My boss and I continued to wear suits, but even we lowered our standards by removing our jackets or even worse, wearing the casual business dress originally permitted.

At the time, I argued that when a client comes to visit or a prospect is brought to our offices, we should look serious, since we were asking them to invest their money with us. These were either corporate investment officers or individuals with millions of dollars of family money to invest.

My boss went back to suits or tie, jacket and slacks, and I retired. Recently, I heard that all are back to suits.

I can assure you that since I am now the client/prospect, when I meet with one of my financial advisers, he is wearing a suit and tie. I am not comfortable giving my funds, earned over a lifetime, to a kid in a T-shirt, Dockers and shower clogs.

If he doesn’t respect himself, I can’t expect him to respect me or my money.

Steve Hagendorf

New City, N.Y.