FLAWED THOUGH IT MAY BE, the House of Representatives delivered an early Christmas present to the advice business when it passed its financial-reform package Dec. 1: It killed an amendment that would have put investment
advisers at broker-dealers under the regulatory thumb of the
Financial Industry Regulatory Authority Inc.
In addition, the bill provided a stocking stuffer to in-vestors who rely on brokers for investment guidance: It would direct the Securities and Exchange Commission to set a standard of conduct for broker-dealers providing personalized investment advice to retail customers that would be in line with the standard applied to advisers.
In essence, Santa would require brokers providing investment advice abide by the same fiduciary standard as RIAs, meaning they must make investment recommendations that are in the best interests of the clients, not just ensure that investments are suitable for clients.
The lump of coal is a provision that would add a big “but” to the rules by allowing brokers to take off their “fiduciary” hat once the advice has been given and it's time to make a sale (see story, Page 1).
The overall intent of the House bill, and the Senate version under consideration, is to level the playing field. The lawmakers want to ensure that the advice investors receive from brokers is untainted by the broker's self-interests.
Most planner and investment adviser groups opposed a proposal that would have put broker-dealer-related investment advisers under Finra's purview, in part because they believed its exchange- and broker-related mindset made it unsuited to oversee investment advisers.
There is still a case to be made for a self-regulatory body authorized to oversee and discipline investment advisers, whether they are independent or broker-related. It could give full attention to monitoring investment advisers and could develop a detailed knowledge of the issues advisers deal with and also of where and how bad apples seek to take advantage of clients.
However, both the SEC and Finra no doubt would resist the establishment of such a body, as each would lose part of its regulatory universe. In addition, such a body would have to be staffed from scratch and probably financed by fees paid by firms employing investment advisers.
The provision in the reform bill calling for brokers to be held to the same fiduciary standards as registered investment advisers is more important for individual investors than for advisers. Investors who ask brokers what they should do with their investments now will have more confidence that they are getting advice unrelated to whether there is a commission attached.
The fiduciary standard should make such conflicts much less frequent, considering the consequences should a dispute land in court.
As we have said, there are many parts of the House reform bill that are ill-advised — the politically sponsored audits of the Federal Reserve, for example. Likewise, elements of the Senate draft should be scrapped.
But the two sections of the House bill dealing with investment advice should be wrapped with a bow and placed under the Christmas tree.
