Do we really need more deliberation on the fiduciary standard, commissioner?

In a recent speech before the National Association of Plan Advisors, SEC Commissioner Michael Piwowar suggested the commission needs to take “a measured and deliberative approach” to the question of whether brokers who offer personalized investment advice to average mom-and-pop investors should have to act in the best interests of those investors. Since the Securities and Exchange Commission has been actively deliberating the “standard of care” for nearly a decade now, I think we can check that box. Moreover, given the questionable arguments Mr. Piwowar puts forward against rule making, it is hard to believe further “deliberation” would make any difference to his views.

Mr. Piwowar started his speech with what has become a signature line: “As demonstrated by the endurance and passion of arguments on all sides, this question is not just really hard to answer. It is really, really, really hard — with three “reallys.’”

However, the broker-dealer trade associations that once adamantly opposed a best-interests standard have now embraced it. The Securities Industry and Financial Markets Association, a trade group of securities firms, for example, has publicly declared its support for SEC rule making to impose a uniform fiduciary standard on broker-dealers and investment advisers. Other major stakeholder groups representing investors, broker-dealers, investment advisers, financial planners and state securities regulators have all agreed that Section 913 of the Dodd-Frank Act provides an appropriate framework for commission rule making. It is true that important differences remain over details of how a regulation should be drafted, but when is that not the case?

BLURRED LINE

Mr. Piwowar erroneously suggested the line between broker-dealers and investment advisers “began to blur … with the growth of fee-based brokerage accounts.” In fact, however, the commission itself erased the line when it permitted brokers to market themselves as objective advisers while still regulating them as sales representatives. In other words, today’s financial advice marketplace is not the result of some natural market evolution, as Mr. Piwowar suggests. Rather, it is the direct result of regulatory action, and inaction, by the SEC. It is worth noting that those commission actions were taken without the careful consideration of costs and benefits Mr. Piwowar now demands for rules designed to fix the problem the SEC itself has created.

Mr. Piwowar makes one concession acknowledging that there is a problem that might need a regulatory fix — he admits that investors are “confused.” And he suggests improved disclosure as the “solution” to that problem.

Ironically, the Rand Study Mr. Piwowar cites in support of this position was commissioned after the SEC had engaged in extensive investor testing of disclosures and had concluded that disclosure was not effective. The study, “Investor and Industry Perspectives on Investment Advisers and Broker-Dealers,” reinforced that conclusion when it showed that investors who were presented with basic fact sheets on the differences between brokers and advisers still couldn’t tell which camp their own financial adviser fell into. This and other research provides overwhelming evidence that a regulatory solution based solely on disclosure is doomed to failure.

The real problem that rule making is designed to solve is not confusion, but the significant and pervasive financial harm that occurs when investors trust self-interested sales recommendations as if they were objective advice. Like the see-no-evil monkey, however, Mr. Piwowar denies having seen any evidence of such harm. But, as an economist, he surely understands that the market for investment products is fundamentally different under the current “suitability” standard than it would be if brokers had to act in their customers’ best interests.

Under a suitability standard, mutual funds and annuities, and other such investments that can’t compete on quality, can and do compete by offering generous remuneration to the sellers, and that’s perfectly legal. Investors end up paying high costs, suffering substandard performance and being exposed to unnecessary risks as a direct result. That has a huge impact on their ability to afford a decent standard of living in retirement or fund other long-term financial goals.

SAME PROTECTIONS

Imposing a best-interests obligation on brokers has the potential to change that, if it is appropriately structured and effectively enforced. It doesn’t reduce investor confusion; it makes that confusion less relevant by ensuring investors receive the same protections when they receive investment advice.

While Mr. Piwowar is blind to the benefits of a best-interests standard, he has an eagle eye for potential harms. In fact, he manages to see risks where none exist. He repeats as unvarnished truth industry propaganda that requiring brokers to act in the best interests of their customers could limit investor choice or increase costs. But this argument is based on the assumption that brokers would be prevented from earning commissions. As Mr. Piwowar surely knows, Dodd-Frank specifies that a uniform fiduciary standard for brokers and advisers would not limit their ability to earn commissions and other transaction-based forms of compensation.

In short, Mr. Piwowar works really hard — indeed, he works really, really, really hard — to avoid the obvious. A best-interests obligation is one of the key factors that distinguishes advice from a sales recommendation. If broker-dealers want to portray themselves as trusted advisers, they need to meet the standard that warrants that trust.

The status quo is unacceptable, and the issue has been studied enough. It is time for the commission to get to work and craft a rule to make this policy a reality.

Barbara Roper is director of investor protection at the Consumer Federation of America and is a member of the SEC Investor Advisory Committee.

Related Topics: Securities and Exchange Commission