Handful of broker-dealers holding back fiduciary rule

Fiduciary advocate says harm to middle-income investors is a ruse

May 10, 2011 @ 4:00 pm

By Mark Schoeff Jr.

One of the strongest advocates for imposing a universal fiduciary duty for retail investment advice is urging a congressional committee to allow the Securities and Exchange Commission to move forward with such a rule.

In a May 9 letter to members of the House Financial Services Committee released Tuesday, the Consumer Federation of America rebutted arguments made principally by the National Association of Insurance and Financial Advisors that subjecting broker dealers to the fiduciary standard would significantly increase their compliance costs and force them to curtail services to middle-income investors.

Under the Dodd-Frank financial reform law, the SEC delivered a staff report to Congress in January that recommends implementing a universal fiduciary duty in order to better protect investors who, the study said, are confused by the differing standards that investment advisers and broker dealers must meet.

The SEC delayed proposing a rule until later in the year, after its two Republican commissioners — Kathleen Casey and Troy Paredes — issued a dissent to the fiduciary report, saying that it did not provide an economic analysis of the impact of fiduciary duty on the advice market.

Republicans on the House Financial Services Committee have asked the SEC not to move forward with a fiduciary rule until it justifies the costs and benefits.

“Unfortunately, a relatively small but highly vocal portion of the broker-dealer community continues to attack the SEC proposal on the grounds that it would harm middle income and rural investors,” wrote Barbara Roper, director of investor protection for the Consumer Federation of America, in the May 9 letter to members of the House financial panel. “We are concerned that arguments with so little basis in fact appear to be persuading some members to advocate a go-slow approach on this top investor protection priority for retail investors.”

Ms. Roper wrote that in its fiduciary report, the SEC “made clear that it is very sensitive to the need to preserve the broker-dealer business model and, with it, investor access to affordable, transaction-based advice paid for through commissions on product sales.”

The Dodd-Frank law already stipulates that charging a commission, selling proprietary products and offering a limited menu of products would not necessarily violate fiduciary duty.

In material that it presents to members of Congress, NAIFA argues that the broker dealers it represents serve “Main Street” investors who cannot afford the fees charged by investment advisers.

A survey of 3,372 NAIFA members conducted last year by LIMRA shows that 58% of NAIFA clients have household income of less than $100,000.

NAIFA said that its members spend about $8,878 annually on compliance costs related to the suitability standard. If those costs were to go up by 15% under a fiduciary duty, 65% of their 200,000 members would shift their business to wealthier clients, stop offering securities, start charging fees or increase their fees.

NAIFA President Terry Headley maintains that the suitability standard, which requires brokers to offer products that fit their clients' investment needs, timelines and risk appetites, protects investors as well as fiduciary duty, which requires advisers to act in the best interests of their clients.

“The Consumer Federation of America's claim that the fiduciary standard of care provides better protection for consumers is a myth,” Mr. Headley said in an e-mail statement. “The suitability standard is robust and heavily enforced. A suitability standard is rules-based and objective, as opposed to fiduciary, which is process-oriented and subjective.”

In a rebuttal to NAIFA's lobbying material that accompanies her letter, Ms. Roper uses the sale of variable annuities — a staple of NAIFA members' business — to argue that the suitability standard is weaker than its fiduciary counterpart.

A broker operating under suitability is free to recommend an annuity over an alternative if it “pays him the highest compensation as long as both were considered appropriate investments for the customer,” while one operating under fiduciary duty “would have to analyze the two options to determine which of the two annuities would be best for the customer … [and] recommend that option.”

In his statement, Mr. Headley said that NAIFA members are subject to annual compliance reviews by their broker-dealer as well as daily compliance enforcement, while annuity products are “dually regulated” by the Financial Industry Regulatory Authority Inc. and state insurance commissioners.

“Most of NAIFA's members are community-based small-business owners, many working as sole practitioners, who provide affordable insurance and financial services to the middle market,” Mr. Headley said.

Ms. Roper dismissed NAIFA's claims about damage being done to small investors by fiduciary duty, saying that there is no “hard data to support the contention.”

“While it is true that such investors cannot typically afford the account minimums or management fees charged by many investment advisers, it is equally true that they cannot afford to pay the high commissions charged by many brokers when lower cost options are readily available,” Ms. Roper wrote.

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