With everything Washington politicians have to worry about this year — gigantic budget deficits, getting re-elected, the disintegration of Arab countries, getting re-elected, the rotten economy and getting re-elected — there's a good chance the fiduciary-standard issue may not be resolved for quite some time.
As our Washington reporter, Mark Schoeff Jr., reported, Republicans on the House Financial Services Committee have asked the SEC not to move forward with a universal fiduciary rule — which was recommended by the commission's staff — until the agency justifies the costs and benefits. One can only guess how long that would take.
In the meantime, investors will bumble along, not having a clue about the rules governing the person who gives them financial advice. Is that person a broker, a registered investment adviser or some combination thereof? Most investors don't know, and care only when something goes wrong.
I have a simple way out of the current miasma, and it capitalizes on the easy-to-understand natural division in the securities business. On Wall Street, the home of clarity (once you understand its ethos — “Where's mine?” — everything makes sense), the world is divided into the buy side and the sell side.
The sell side, as you know, consists of the investment banks/broker-dealers who create, peddle and trade financial instruments. On the great bazaar that is Wall Street, these firms will make and sell whatever a buyer wants. Want a bond or bondlike piece of paper that pays 13%? Wall Street will create it. Does the fact that no legitimate, rational business entity can afford to pay 13% interest in today's climate stop the Street from creating such an instrument? Don't be a fool! As long as you don't look under the hood and don't care about the price, Wall Street will create anything you're willing to pay for.
The buy side consists of the mutual funds, pension funds, hedge funds endowments and, indirectly, the mom-and-pop investors who buy the stuff that Wall Street creates. Buy-siders can be as crafty and avaricious as the sell-side, but since they manage huge pots of money, their motivation usually is centered on how much they can increase the size of the pot, not just how much they can ladle out for themselves.
So here comes the solution.
Under the current regulatory scheme, registered reps come under the sell-side regulatory umbrella of the Financial Industry Regulatory Authority Inc. Registered investment advisers are on the buy side.
Even though their compensation is shifting from commissions to fees, reps who are employees or independent contractors of broker-dealers are regulated to prevent sales abuses. RIAs are regulated to prevent the abuse of trust.
To let ordinary investors in on the differences, anyone getting paid for financial advice should be required to use business cards that have either an S or a B statement on the back, like a cigarette warning.
The S card statement would be for sell-siders. It would state:
“I am a registered representative of XYZ Corp. My firm and I are regulated by Finra and the investments I present for sale to you must be suitable to meet your needs, although not necessarily the best choice among several. My firm and I may sell you products from the firm's own inventory and we may earn more for some investments than others.”
The B card would say:
“I am a registered investment adviser. My firm and I are regulated by the Securities and Exchange Commission (or the securities regulator in the state in which the firm operates) and the investment recommendations I make to you are made with your interests above all others, including mine. I am compensated solely by you in the form of a percentage of the assets I manage for you or some other fee.”
While these statements aren't a full legal explanation of the suitability and fiduciary standards, they do a much better job of explaining who does what than a card plastered with the acronyms Finra, SIPC, SEC and RIA.
Who knows, maybe a B-S solution will solve an investor protection issue that is anything but.