The mainstream press on the left and the right is lately beating the drum for the fiduciary standard. On Thursday, the New York Times ran a story that suggests that stock brokers and registered reps are simply product pushers who do not have their clients' best interests at heart. Wall Street firms have been fighting the inclusion of a fiduciary standard in reform legislation being debated in Congress, because the additional disclosures, legal liability and monitoring required to adhere to such a standard would cost them revenue.
Also on Thursday, a PBS blog called “Xchange,” wrote about the distinctions between the fiduciary and suitability standards, saying that the latter leaves a lot of room for bad advice. And last week, The Wall Street Journal ran, “Brokers Win, Investors Lose Key Reform,” which laments the fact that a uniform fiduciary standard for brokers has been dropped from the financial regulatory reform bill now being considered in Washington.
It's unlikely a little bit of media attention will change any minds in Washington, but it could certainly influence brokerage clients, many of whom have already been migrating to investment advisers who act as fiduciaries on the RIA side of the business.
Schwab Advisor Services polled 1,144 advisors in January at independent advisor RIA firms who custody their assets at Schwab. Some 92 percent of respondents said they won new clients in the last six months and that 46 percent of these new clients had previously worked with brokers at wirehouse firms. Meanwhile, 83 percent of respondents reported that their role as a fiduciary helped them win new business. Another 65 percent of advisors say one reason they won new business was that clients had lost trust in their former firms.
“If members of Congress get a lot of pressure from the media and that gins up activity on behalf of their constituents, that can change opinions,” said one lobbyist for the brokerage industry in Washington who preferred to speak off the record. “I don’t think it’s yet had that effect. And we hope in this area that it will not. All that we’re hearing right now is that there’s a growing consensus among Senate Banking Committee members in support of the Johnson amendment, which would authorize a study on all the efforts to harmonize b/d and investment adviser regulation. I hear from both sides of the aisle that they have the votes for the amendment and that it’s likely to be in the next draft of the bill.”
Senate banking committee chairman Christopher Dodd said today that he expects action on the financial services industry regulatory reform bill early next week. Under current draft legislation, a fiduciary standard for brokers has been dropped in favor of further study on the impact a fiduciary standard. The biggest sticking point in the bill right now is whether a proposed Consumer Protection Agency will be independent.
Defenders of the fiduciary standard argue that the 18 month study, recommended by Senator Tim Johnson (R- S.D.), incoming Senate Banking Committee Chair, is a delaying tactic intended to kill the issue entirely, as the fiduciary standard and differences between brokers and financial advisors has already been studied up, down and sideways. But those on the other side of the debate argue that putting a fiduciary standard into place across the board will make it too expensive to serve clients with smaller accounts, and that implementation will be difficult, subjects that need to be examined more closely.
The New York Times article cited a research report from Bank of America Merrill Lynch analysts Guy Moszkowski that said a fiduciary standard could cost a firm like Morgan Stanley Smith Barney 6 to 7 percent of its earnings, or $300 million, “if the rules were tightly defined.”
Of course, most large wirehouse firms and RIAs already screen out smaller clients with asset minimums of $250,000 to $1 million. Investors with less often get kicked to call centers anyway. But some financial advisors at independent broker/dealers do cater to clients with smaller accounts.
The lobbyist said the story line about the fiduciary duty is unfairly biased: “If you’re working for someone that is getting paid a commission, they’re obviously a crook and I think that’s more than a little simplistic and misleading and inaccurate. I don’t think it’s the way someone is compensated or registration status that determines the content of their character. There is fine work done by commission-based sales people and investment advisers alike.”