Commentary 3/24/2011
Several media outlets including Bloomberg, AdvisorOne and Investment News are reporting that Rep. Steve Garrett, R-NJ, chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises led a group of Republican lawmakers in submitting a letter to SEC Chairwoman Mary Shapiro urging her to stop implementation of a fiduciary standard for investment advisors. The quotes pulled from the letter by the news sources were: “The Commission has not identified and defined clear problems that would justify a rulemaking and does not have a solid basis upon which to move forward” and that the SEC should conduct “much more rigorous analysis” and provide “proper analytical justification for action” before considering a rule.
As fiduciaries, we find this very disappointing. The SEC was given an opportunity to protect investors. Lawmakers have asked the SEC to cease and desist. We believe that financial planning and asset management should be conducted with the clients’ best interests in mind. It is troubling that many people incorrectly believe their brokers are fiduciaries who must act in their best interests. In fact, brokers adhere to a “suitability” standard which requires that they make recommendations that are “suitable” based on a profile and not necessarily best for the client. This means that the broker can choose from several “suitable” investments for the client, not necessarily the best investment for the client. Why would a broker choose a “suitable” investment that is not the best investment? Brokers are compensated by commissions on what they sell. Consequently there is an inherent conflict of interest in doing what is best for the client and what is best for them. Brokerage firms also have an interest in designing and promoting their own products and in selling from their inventory of bonds and other products.
The quotes above leave us dumbfounded. The SEC was charged with completing a study of the application of the fiduciary standard of care to all financial advisors and investment managers. It did. It found that consumers do not understand what responsibilities their advisors have. It recommended a uniform fiduciary standard for all financial advisors and investment managers. It noted that consumers shouldn’t have to parse through legal documents to understand what duties are owed to them. The study clearly articulated a rationale for a fiduciary standard.
One certainly must question the motivation behind Steve Garrett and his fellow lawmakers. The brokerage business is very lucrative, and the big players have deep pockets, not just for the ads you see on TV, but also for the lobbyists who advocate for their interests in Congress. Despite the obvious, inherent conflict of interest in being compensated through commissions, the Dodd-Frank legislation specifically allows the practice to continue. This leaves us wondering why the brokers’ lobbyists are still fighting the application of the fiduciary standard if brokers would still be allowed to collect commissions while acting as fiduciaries.