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Indecent Exposure

I've got a feeling that the opponents of a fiduciary standard have boxed themselves into a corner.

Of course, these opponents are telling the world that they totally support a fiduciary standard, and then they offer proposals that would “harmonize” the word “fiduciary” with their own sales model. To me, this is a bit like having murderers and thieves “harmonize” the term “legal” with their nefarious business activities; the two concepts are utterly opposed to each other, and any “harmonization” is really more of an abduction.

In the five years leading up to the Department of Labor's recent fiduciary proposals, the brokerage industry and the Financial Services Institute (the independent broker-dealers) managed to win some powerful concessions. Perhaps the two biggest were the idea that their reps would be able to earn commissions when they sold investment products to a qualified plan, and the fact that they could avoid having to act as fiduciaries if they provided certain disclosures and jumped through certain hoops. They celebrated the fact that they wouldn't have to treat qualified plan participants with the same degree of care that they would offer their own mother or grandmother.

To win those concessions, the brokers and independent broker-dealers had to argue that it would be just too darned unprofitable for them to offer their advice to less wealthy plan participants if they had to watch out for those peoples' best interests. This begs the question of whether those working Americans are better off having access to service providers who refuse to act in their best interests.

For most of us, this is very familiar ground. But for the consumer press, and people who write for non-professionals, this is really the first time these nakedly self-interested arguments have been widely disseminated. For the first time, ordinary people are reading that the brokerage firms and independent broker-dealers are standing four-square in favor of commission sales and strongly against having to serve the best interests of their customers. In today's low-attention-span world, I suspect many people reading those articles are taking helpful mental shortcuts, and thinking of independent BD reps and wirehouse brokers as the commission salespeople who don't like the idea of giving the customer a break, and are fighting against the government forcing them to play fair. (I should add that this is a huge disservice to the dually-registered reps who do, in fact, put their clients' interests first, but the FSI leadership doesn't seem to have a problem with that. They're standing four-square behind the salespeople in their systems.)

When the audience was competing fiduciary advisors, the brokerage firms seemed to be fine with this publicity. But there is evidence that they're growing a bit squeamish about having their lobbying positions so clearly expressed to the customers that they want to attract. Recently, Merrill Lynch CEO John Thiel suggested that his firm could indeed work under the DOL's proposed fiduciary standard and recommended that his colleagues reconsider their opposition to the initiative. Of course, he's coming out in favor of the proposal that would permit commission sales, and therefore compromises (“harmonizes”) the fiduciary concept, but his public comments move Merrill safely outside the pall of negative publicity.

Meanwhile, SIFMA, the trade organization of the brokerage firms, has been strangely quiet about the DOL proposal's release. Not so the FSI, which couldn't even wait for the ink to dry before it had put out press releases decrying the DOL's efforts as “hasty” (After five years of study? Really?) and simply unworkable. We've even seen cries of protest about the sales of questionable products; LPL CEO Mark Casady has worried publicly that the current proposal will cause advisors to lose 7% commissions because they could no longer sell non-traded REITs to IRAs. (Last year, LPL generated $211.6 million in commission revenue from the sale of alternative investments, primarily non-traded REITs.)

I suspect that the organization, which has marched in lockstep like SIFMA's little brother with the various brokerage lobbying positions, was simply doing what it expected SIFMA to do. But now the FSI finds itself standing alone in that spotlight of championing sales commissions and deploring the idea of treating less-wealthy customers like a family member.

Does this mean that opposition to a true fiduciary standard is crumbling among traditional sales organizations? I doubt it. I expect that while FSI screams that the DOL is picking on its commission sales model, SIFMA is going to re-craft its message so that the real goals are not so easily visible. Expect to see a lot of stalling (as in: we need more time to study this), threats of a lawsuit and other tactics that aren't as quotable in the press.

This, of course, looks like a double-cross of the FSI, leaving the independent BDs to take the brunt of the negative publicity while the brokerage firms zag in an unexpected direction. But soon enough, I expect the FSI to fall in line as the little brother of the brokerage community, the friend of “harmonization,” the enemy of the fiduciary standard that has existed for centuries, as a confederation of organizations that simply cannot make a profit serving “the little guy” unless they can sell them commissionable products that the little guy doesn't realize he doesn't want or need.

My take: bring it on. The longer this lobbying effort drags out, the more articles we'll see. The more times this story comes up, the more the consumer writers will realize uncomfortable facts about conflicted business models that the members of the brokerage and independent BD community don't want their customers to know. For the sake of consumers (and especially “the little guy”) I hope the DOL eventually passes its fiduciary initiative. In the meantime the process of getting it past the special interests in the financial services world will continue to be a wonderful eye-opener for the public.