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You’re Now a Fiduciary, But It Doesn’t Change Much

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Ron Rhoades, president of ScholarFi and former chair of NAPFA, writes today about a new fiduciary standard out of the SEC that allows brokers and broker/dealers to continue such business practices as 12b-1 fees, conflicts of interest if disclosed, and sales of “highly costly, toxic and inappropriate securities products.”

Sound too good to be true? Well, it is. Temporary Rule 275-204.1T is nowhere to be found on the SEC’s website, and Rhoades’ blog post, as you might have guessed, is an April Fool’s joke. But it’s a definitely a fun read. It provides a hilarious yet ridiculous view of what an extremely watered down version of the fiduciary standard—one that would fit nicely into b/d firms’ current practices—could look like. A ‘dream’ fiduciary standard for the securities industry, if you like. Here’s what it would mandate:

1.     All registered representatives of broker-dealer firms will be immediately permitted to provide personalized investment advice, including financial plans, strategic asset allocation, tactical asset allocation, portfolio rebalancing, individual stock selection, to their customers.

2.     All registered representatives of broker-dealer firms will be immediately permitted to receive ongoing fees for such personalized investment advice, through asset-based percentage fees, albeit paid indirectly through deduction from the investment products which are sold. These fees will be immediately renamed as "relationship fees" rather than 12b-1 fees.

3.     All registered representatives of broker-dealer firms will be immediately permitted to use titles which denote relationships of trust and confidence, such as "financial consultant" and "financial advisor" and "wealth manager."

4.     All registered representatives of broker-dealer firms will be immediately permitted to tout, both directly and through "house on the beach" and "attend their clients' childrens' soccer games" advertisements, their "objective advice" and that they act "in the best interests of the client" (in accord with their firms' advertisements and representations and, as well, their firms' codes of ethics).

5.     All registered representatives of broker-dealer firms shall, accordingly, be immediately required to adhere to the fiduciary duty of loyalty. However, this adherence will only require, when a conflict of interest is present, that casual disclosure of that conflict of interest occur to the client. Only the disclosure "Our interests may not be aligned with yours" shall be required. There shall be no requirement that the registered representative ensure that the client achieve an understanding of the conflict of interest, given that behavioral biases (which registered representatives have been trained to take advantage of) exist which negate such understanding, anyway. There shall, henceforth, be no requirement that informed consent of the client be obtained; in other words uninformed consent shall be permitted instead. Additionally, the proposed transaction need not, with such uninformed consent, be in the best interest of the client and substantatively fair to the client. In other words, under the Commission's new definition of fiduciary, clients may accordingly consent to harm.

6.     When acting as a "fiduciary," even then registered representatives of broker-dealer firms will be permitted to remove their fiduciary hats, at will, with only casual notice to the client, in order to be permitted to more blatantly sell their customers highly costly, toxic and inappropriate securities products. Furthermore, continual "hat-switching" is permitted, for it is known that investment recommendations will need to be undertaken by reference back to the investment strategy and the financial plan provided to the client. Furthermore, two hats - one fiduciary and one non-fiduciary, may be worn at the same time, with respect to the same client as long as two different accounts are maintained, even though it is acknowledged that clients / customers will possess even greater confusion as to the standards to which their “advisors” are held.

Rhoades goes onto say that the rule was designed to allow broker/dealers to continue their business practices, and to make sure profits never fall below 35 percent.

The Commission likewise does not desire to see that a true profession of investment advisers and financial planners come into being, it being instead the Commission's desire to preserve, at all costs, the merchandizing aspects of the securities business. It is acknowledged that professional regulation, under a bona fide fiduciary standard, would greater ensure the financial and retirement security of all Americans, but the Commission is under the view that the financial security of Wall Street's firms takes precedence.

I’m sure it’s all in good fun, but the brokerage industry can’t be happy with this. Their party line has been that they support a uniform fiduciary standard. And while I agree that they’ve wanted a different standard than the current one, I don’t think anyone has tried to water it down this much. It's a political message, no doubt. It shows the dangers, however outrageous, of giving the brokerage industry any kind of “pass” or “exemptions.”

Do you think his message will make a difference?

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