Client protection ruse needs to stop

Advisers should demand that industry organizations speaking for them don't let greed overshadow their true mission to help people live sound financial lives.

It’s easy to stoke fear in an effort to cloud or divert attention from real issues. But in the financial advisory world, it’s getting harder and harder to ignore key industry players’ doing just that when it comes to regulatory proposals.

Covering these issues online and in print at InvestmentNews, we can’t help but notice, for example, how often the response to Finra’s Comprehensive Automated Risk Data System proposal is, “It will compromise investor privacy and data security!”

This objection would be valid if not for the fact that Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc., has said — until he’s blue in the face — that the customer data collection system won’t include personally identifiable information.

As Mark Schoeff Jr. reported last Monday, Mr. Ketchum said that “not one iota of personal information” would be collected.

Oh, the regulatory notice says that, too.

Despite this, the president and CEO of the Securities Industry and Financial Markets Association, Kenneth Bentsen Jr., said that, in addition to costs and likely redundancies, there’s a “philosophical problem” with the CARDS proposal.

“Turning over account-level data on a regular basis to one quasi-government entity is something the public doesn’t like doing,” Mr. Bentsen said.

REAL CONCERN

If the real worry with CARDS is the cost to clearing firms and broker-dealers of implementing the system — a legitimate concern — trying to sound altruistic comes off as spin and does nothing but divert attention from the im-portant issue of expenses.

A more obvious and troubling case is the proposed uniform fiduciary standard for anyone providing retail investment advice.

Broker-dealers who oppose this effort typically claim that moving to such a standard will reduce middle Americans’ access to brokers or to commission products, or force all investors into fee-based managed accounts.

Where’s the data?

One impartial academic paper that studied actual differences in state broker-dealer fiduciary rules to determine effects on consumers provided useful conclusions, but it largely has been ignored.

The paper, by Michael Finke, a professor at Texas Tech University, and Thomas Langdon, a professor at Roger Williams University, found the differences inconsequential between states with strict fiduciary duties and those with none.

First, the number of registered representatives per household didn’t vary significantly between states with strict fiduciary standards and those with no standards.

Second, the authors say, “We find no statistical differences between the two groups in the percentage of lower-income and high-wealth clients; the ability to provide a broad range of products, including those that provide commission compensation; the ability to provide tailored advice, and the cost of compliance.”

Fear mongering seems to be the sharpest tool at hand to kill any proposal, and in some cases it works.

For example, both the Congressional Black Caucus and Congressional Hispanic Caucus were sufficiently scared into writing letters opposing the Labor Department’s fiduciary proposal, believing industry prattle that people in their communities would be hurt by a requirement that advisers act in clients’ best interests.

DOL’s efforts have been fiercely attacked by the financial industry. Fiduciary advocates suggest the industry favors a Securities and Exchange Commission proposal because it would be governed by Dodd-Frank, which includes safe harbors for commissions, sales of proprietary products and products from a limited menu, and a standard of care that ends when the transaction does. Assistant Labor Secretary Phyllis Borzi’s repeated assurances that any revised DOL fiduciary rule also would allow for commissions have been either ignored or questioned.

COUNTERPRODUCTIVE

The point in both these examples is not that broker-dealers should not be concerned about compliance and liability costs and potential revenue losses from regulatory action. Rather, it’s that hiding behind a beneficent canard of client protection is deplorable — and ultimately counterproductive. It detracts from real problems with some regulatory proposals and adds to the distrust the industry is drowning in.

Advisers should demand that the industry and advocacy organizations speaking for them don’t let greed overshadow their true mission to help people live sound financial lives.