By now I’m sure you’ve heard that Jack Brennan, former Chairman Emeritus of Vanguard and a longtime board member of FINRA, has been elected chairman of FINRA’s Board of Governors. He succeeds Richard Ketchum.
I have to confess that when I first heard this, my jaw dropped to the floor so hard that it made a visible dent. Vanguard has been a champion of just about everything that FINRA’s brokerage members are not: low fees, a consumer-oriented fiduciary focus, and above all a management structure that encourages loyalty to the best interests of investors in the funds. In fact, I’ve often wondered how Brennan managed to survive on a board of governors where he was outvoted not just by the industry representatives, but also the former senior brokerage executives who have masqueraded as “consumer” or “independent” members of the board.
In some messages back and forth after the announcement, one prominent advisor referred to this as “the hen guarding the foxhouse.” It seems appropriate.
I think there’s ample evidence that FINRA exists, not to protect the public, but to protect the revenue model of the brokerage industry. Case in point: when Ketchum proposed to implement a system of real consumer protection—the now-infamous CARDS system—there was a hullaballoo from the industry and he was forced to back down. CARDS would have monitored brokerage recommendations in real time, something that Wall Street didn’t want.
Another case in point: the atrocious management of the BrokerCheck system, where there is routine expunging of records that would otherwise warn consumers about adverse arbitration outcomes and systematic regulatory problems with the people giving them advice. BrokerCheck also seems to be deliberately hard to use and gives you no information on whether or not a rep or broker has a lot of arbitration cases piling up, or a sketchy regulatory background.
Another case in point: when Ketchum tried to create a disclosure system that would tell the public when a broker has accepted a bunch of up-front money to change wirehouse affiliations, the proposal was fought bitterly and then ultimately watered down—despite the huge conflicts of interest that these transactions pose to the public. (Do you think the brokerage firm paying out that fat bonus expects the broker to make that money back for the firm?)
Then there’s the cozy FINRA arbitration system itself, where the arbitrators will sometimes refer to the brokers by their first names, perhaps because they see them so often. And FINRA has recently been exposed, both for allowing firms simply not to pay the monies awarded to aggrieved customers, and for ignoring the fact that these companies clearly advertise that they offer a fiduciary relationship by allowing them to claim that their recommendations are nothing more than sales. After all, didn’t the 90-year-old consumer accept the advice to buy those annuities, life insurance policies and penny stocks?
I suspect that I could go on here for another few hundred pages, but I think you get the gist. The point of all this is that it would appear that we have an honest man in the FINRA Chairperson’s seat, who has at least an inclination to support a fiduciary mode of behavior.
I propose that we embarrass him at every opportunity—and I’m dead serious when I say that. We—the financial planning profession—should raise the issues I’ve outlined before Brennan gets coopted into Wall Street group-think. Are those Board of Governors members truly selected from the consuming public, or are they recycled executives of the firms that FINRA allegedly was formed to regulate? Is there any good reason why the CARDS technology should be rejected, except that brokerage firms want to preserve plausible deniability when their reps follow the money and look for shortcuts to top producer status? Why doesn’t BrokerCheck serve its alleged purpose of telling consumers all about the regulatory and arbitration history of the top producing brokers? Shouldn’t we have a more objective arbitration forum?
Yes, this is a mean thing to do to someone who, by all accounts, is a decent and honest man. But that’s the point. It will be interesting to see whether the decent, honest man is willing to continue to allow FINRA to play games with the truth and with the investing public, to pose as a regulatory to the outside world and protect a predatory service model to consumers. This may be a huge opportunity to bring the brokerage industry back to what we are told it once was: an industry that facilitated building wealth in America. FINRA has been great at building extraordinary wealth for its members—at the expense of its customers and sometimes the integrity of the global financial system itself. Let’s be vocal about asking John Brennan to get those members to start acting more like Vanguard.