Adviser group tells SEC small investors would be hurt by fiduciary standard

Massachusetts' securities chief Galvin begs to differ

Jul 2, 2013 @ 5:13 pm

By Mark Schoeff Jr.

Middle-income investors would be harmed by a rule that the Securities and Exchange Commission is considering that would raise investment advice standards for brokers, according to a letter sent today to the agency by a major trade association for registered representatives.

As part of the letter, the National Association of Insurance and Financial Advisors released a survey showing that 84% of financial advisers said that their business costs would increase if the SEC lifted the advice bar.

The poll indicated that 43.9% of the respondents would pass on the higher costs to their clients by imposing or increasing fees, while another 48% said they would limit their practice to clients with a minimum amount of assets.

NAIFA and the American College of Financial Services conducted the online poll of 2,419 NAIFA members, school alumni and other financial professionals from May 20-29. About two-thirds of NAIFA's approximately 41,000 members are registered representatives of broker-dealers and mostly sell variable annuities, variable life insurance and mutual funds.

The NAIFA letter responded to an SEC request for information for a cost-benefit analysis the agency is conducting of a potential uniform fiduciary standard for retail investment advice. The deadline for comment letters is July 5.

The Dodd-Frank financial reform law gave the SEC the authority to require that anyone providing retail investment advice act in their clients' best interests, the fiduciary standard that investment advisers already meet. Brokers currently adhere to a less stringent suitability standard that requires that investment products they sell meet an investor's financial needs and risk profile.

In its letter to the SEC, NAIFA emphasized that 83% of the advisers surveyed said that the majority of their clients have investment portfolios of less than $250,000, and more than half serve clients with less than $100,000 in their accounts.

NAIFA argued that raising the broker advice standard to the fiduciary-duty level would increase compliance costs and force them to abandon investors with modest assets.

“We respectfully recommend, therefore, that the SEC not take any action that would amount to an attempt to cure a problem that has not been demonstrated to exist and which could have the unintended effect of reducing the access of middle-and lower-income-market investors to needed financial products, services and advice,” Susan Waters, NAIFA's chief executive, wrote.

A letter filed last week by Massachusetts Secretary of the Commonwealth William Galvin made the opposite argument. Mr. Galvin asserted that average investors are hurt by brokers who do not have to act in their best interests but rather can sell high-commission, risky alternative investment products as long as they meet the suitability parameters.

He cited a 2010 Massachusetts case in which investors lost $5.7 million on fraudulent private-placement notes. He urged the SEC to find similar data about losses investors incurred due to bad advice from brokers.

“I urge the commission not to capitulate to industry advocates and the courts that would relegate investor protection to a 'bean counter' analysis concerned with the quantification of industry costs to the exclusion of the harmed warm-blooded investor,” wrote Mr. Galvin, the chief Massachusetts securities regulator. “While you cannot put a price on investor protection, you can gauge the price paid by investors from the losses they suffer under the current system.”

Mr. Galvin pointed to his department's recent survey of 192 Massachusetts investment advisers. He said that they indicated that a high fiduciary standard would lower costs to investors by “keeping inappropriate and overly expensive investments” out of their portfolios.

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