Skip to content

Fill the Gap

Chances are, as you read this, there is an independent broker-dealer conference going on somewhere around the country. The SEC now lists 789 BD firms, many of them independent, and each of them will hold multiple conferences because non-traded REIT sponsors, life and annuity companies and load mutual fund firms will pay high fees to exhibit and also speak to the reps about how to sell their products. (Sales point at a recent meeting I attended: use nontraded REITs as a substitute for bonds in your client asset allocations. What can go wrong?) It's a form of payment for shelf space that the SEC hasn't caught onto yet, and the best thing about it is that the reps get CE credits for learning all the top sales features of the higher commission products on their shelves.

Early in each of these meetings, the reps will be told, by somebody in senior management, that the Financial Services Institute-the trade organization of independent BDs-will be spending enormous sums of money this year to fund a grass-roots campaign to fight against the Department of Labor fiduciary proposals which have not yet actually been released. Apparently, the FSI is going to create talking points that reps can use with clients, and will also feed these to the credulous members of the consumer press.

One imagines some of the better ones:

“Requiring brokers and reps to act in your best interests is definitely not in your best interests.”

“Stand up against the fiduciary standard or it will become unprofitable for brokers and reps to give sales pitches disguised as professional advice to middle-market customers.”

“Don't let the Department of Labor take away our industry's Constitutionally-protected right to put its hands in your pockets when you're not looking.”

“Higher costs are better than lower ones.”

“Stand strong with us to protect hidden fees.”

There are so many things wrong with this campaign that I hardly know where to start, although the fact that the proposals haven't even been made public yet ought to be included somewhere in the first paragraph. A bigger problem, for me, is that many advisors and reps associated with the independent BDs are joining hands with this cynical campaign when, in fact, they DO put their clients' interests first as a matter of business routine, and they DO act as a fiduciary in their dealings with the public.

Why would they want to campaign against their own model? To me, it would be like doctors joining drug company salespeople lobbying against the Hippocratic Oath because, well, it's inconvenient from a business standpoint when everybody has to do what's best for the patient.

Bigger still is my disappointment with the independent BDs themselves, who are enthusiastically jumping on this FSI campaign bandwagon. This, after all, is the industry that started the financial planning movement in its early days, and brought the first spark of idealism out of the darkness of the brokerage business model. Today, the independent BDs have decided to stand four-square with the large brokerage firms obstructing any initiative that would get in the way of a predatory business model.

And then, when you talk with BD executives, they immediately complain that they're misunderstood, that the press and public thinks they're mostly sales organizations. What do you EXPECT the press and the public to think when you and your trade organization spend your lobbying budgets furiously battling against any initiative that would protect the public against predatory sales tactics?

The brokerage argument that regulators seem to find most persuasive is that if brokers/reps are forced to treat their customers like their mother, then it just wouldn't be profitable enough to justify working with average people. Therefore, many millions of average people would be left out in the cold, unable to access sales pitches from brokers and reps, without ever having the opportunity to be told to buy a non-traded REIT, a variable annuity with high surrender charges or a separate account that shares its high fees with the brokerage firm in what is definitely (are you listening, SEC?) NOT a payment for shelf space.

Of course, there's a counter to that argument. Smaller qualified plans represent a potentially lucrative corner of the investment market-indeed, hundreds of billions of dollars in relatively large chunks (compared with consumer accounts) which will see fees drop dramatically if everybody reading this column were to agree to set up and preside over these plan portfolios for 50 basis points a year. And as I showed in the last issue of Inside Information, this is not much more complicated (if at all) than the work you're doing now with individual clients. Many fiduciary advisors, who have long since decided to put their clients' interests first, are well-qualified to fill the gap that would be left if the brokerage and FSI world were to make good on their threat to abandon smaller plans. It would, in fact, create an enormous transfer of market share.

How can we communicate that to the regulators, the press and consumers who might be anxious that they'll lose access to high-cost, hidden-fee-infested retirement accounts? The Committee for the Fiduciary Standard has an answer. They've created a letter that you can sign, pledging to fill the gap. You go here:, click on the link toward the middle of the front page, and basically promise that you'll work with smaller retirement plans should there be an emergency shortage of brokers catering to these accounts in ways that are definitely not the way they would treat their mothers.

Click the link, sign the page and then look around for a third-party administrator who will walk you through the process-or, if you're affiliated with TD Ameritrade, the process will be even easier.

That won't make me less disappointed in the independent BD community, or less puzzled that their reps will follow them down every dark lobbying alley. But it might help blunt the ridiculous threat that seems to give the regulators pause, and help them figure out whether peoples' best interests are served if they work with people who will watch out for their best interests.