SIFMA: Flawed fiduciary duty could smack investors

Group's research indicates commission-based accounts most cost-effective; critic dubs study ‘a complete and total waste'

Nov 2, 2010 @ 4:01 pm

By Mark Schoeff Jr.

A leading financial industry organization warns in a new study that a universal fiduciary duty for retail investment advice could cost investors money — that is, if it doesn't accommodate fundamental features of broker-dealer business practices, such as charging commissions and selling proprietary products.

“Commission-based accounts provide the most cost-effective option for investors across the wealth spectrum today,” according to the study, which was commissioned by the Securities Industry and Financial Markets Association and released Tuesday. “Broker-dealers play a critical role in the financial services industry that cannot be easily replicated with alternative-services models.”

The Securities and Exchange Commission is conducting a study of the standard of care for investment advice, analyzing the differences in oversight of investment advisers, who operate under a fiduciary duty and charge fees, and broker dealers, who adhere to a suitability standard and charge commissions.

In its report, SIFMA said that an investor with $200,000 in assets would pay $460 more annually in additional fees if he or she had to shift to a fee-based adviser, from a commission-based brokerage. SIFMA said that fee-based advice typically is 25% to 75% more expensive than commissions.

“The study shows that investors want to choose who they get to work with and how they pay for them,” said Ira Hammerman, SIFMA's senior managing director and general counsel.

Critics said that the SIFMA report is misguided because the Dodd-Frank law already states that charging commissions and selling proprietary products are not considered fiduciary breaches.

“The entire study is a complete and total waste,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It evaluates a situation that isn't remotely on the table. Nobody is talking about eliminating brokers' ability to charge commission, and they know that.”

Survey data were culled from 17 SIFMA member firms that serve 38.2 million households and manage $6.8 trillion in assets, according to the organization.

SIFMA sent the report to the SEC to try to shape its study, which was mandated by the Dodd-Frank financial reform law and is due to Congress in January. The law also gives the SEC the option to write a regulation that would impose a fiduciary duty on investment advice.

Mr. Hammerman acknowledged that Dodd-Frank gives safe harbor to commissions. He said that SIFMA was responding to the SEC's effort to gather information about the potential impact of a universal fiduciary duty on consumers.

“One area they want to learn more about is the cost to investors if everyone is forced into the fee-based bucket,” said Mr. Hammerman, who argued that a 1% fee for advice would significantly set back investors in municipal and Treasury bonds. “That's really going to start to tear away at overall returns.”

The study asserts that access to municipal bonds would be crimped under a universal fiduciary standard, which would prevent principal trading. SIFMA said that 93% of municipal and corporate bonds held by investors in the lowest-net-worth segment are purchased through brokerage accounts.

Currently, investment advisers must adhere to a fiduciary duty, which requires that they act in the best interests of clients and disclose all material conflicts of interest. Broker dealers have to meet a less stringent suitability standard that ensures that products fit a client's investment needs, timeline and risk appetite.

Fiduciary advocates say that SIFMA's concern about commissions and proprietary products is a canard.

“The SIFMA report appears to be self-serving,” David Tittsworth, executive director of the Investment Advisers Association, wrote in an e-mail. “The IAA has never suggested that ‘all brokerage activity' should be subject to the [Investment] Advisers Act [of 1940]. Instead, we believe the law should treat brokers who provide investment advice the same way as investment advisers.”

SIFMA's report represents a shift in its attitude toward fiduciary duty, according to Ms. Roper.

“Why did SIFMA decide to revert to all-out opposition to imposition of a fiduciary duty rather than a constructive debate about the best policy approach,” Ms. Roper asked. “SIFMA had carved out a more responsible position in the legislative debate.”

Mr. Hammerman countered that SIFMA has not changed its stance on a universal fiduciary duty. It is trying to ensure that the SEC's definition for what is in the best interest of clients allows the brokerage model to exist.

“SIFMA is firmly in favor of a new uniform fiduciary standard of care for personalized investment advice for retail customers regardless of whether that provider is a broker or an investment adviser,” Mr. Hammerman said.


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