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Shameful Shell Game

This year, the SEC is planning to come out with some kind of “harmonized” “fiduciary-related” set of rules and regulations for brokers and advisors. There is little indication what, exactly, this will look like, but the most furious lobbying has been around, of all things, requiring brokers to register as RIAs with the SEC.

I think most of us have wondered why the Wall Street firms have been so adamant on this issue, especially since dually-registered advisors are able to engage in sales-related activities on behalf of their independent BDs.

Now I think we know. It may be the most cynical, self-serving lobbying position you’ve ever heard of, and it looks like the SEC will cave on that issue.

A few months ago, TD Ameritrade Institutional held a fiduciary summit meeting which, among other guests, brought together four former SEC chairs to talk about whether a fiduciary rule is desirable or even possible. But for me, the most eye-opening part of the day came when an attorney for the Public Investors Arbitration Bar Association took the stage.

Christine Lazaro is Director of the St. John’s Law School’s Securities Arbitration Clinic, and a board member of the Director of the Public Investors Arbitration Bar Association (PIABA). She is also the co-author of a report on investor confusion and securities arbitration (you can find it here:, and presented some of findings that demonstrate exactly how the brokerage industry gets away with sales activities to consumers who think they’re working with a professional.

Lazaro offered examples of brokerage advertising that clearly positions the firms as fiduciaries who sit on the same side of the table as clients-whose brokers should obviously register with the SEC. She cited UBS’s “We will not rest” campaign, whose advertisement read: “Until my client knows she comes first, until I understand what drives her and what slows her down, until I know what makes her leap out of bed in the morning and what keeps her awake at night, until she understands that I am always thinking about her investments, even if she isn’t, not at the office, but at the opera, at barbeque, in a traffic jam, until her ambitions feel like my ambitions. Until then, we will not rest. UBS.”

“UBS described the “we will not rest” campaign as reflecting UBS’s desire to always work in the best interests of clients,” said Lazaro, “and highlighting its uncompromising dedication to the detail of delivering the products and services that best meet their needs.” Okay… So what’s the problem with registering these brokers who always work in the best interests of clients as RIAs?

Then Lazaro turned to Morgan Stanley, whose web presence has stated that: “It is important to have an intimate knowledge of you and your goals. Today, Morgan Stanley states that it is meeting your needs at every life stage, whether you are starting a family or planning to retire. Looking fund your childrens’ or grandchildrens’ education, or the purchase of a vacation home, seeking to address healthcare needs or transfer the family business to the next generation. You need a wealth plan. Our financial advisors work with our clients to create this roadmap to their future, adapting to changing circumstances over time, helping clients achieve and protect their goals.”

Lazaro pointed to Merrill Lynch’s advertising and website, which talks about “the evolution from a conversation to a relationship,” and went on to say: “Creating a financial strategy that reflects your personality. Getting to know you is your financial advisor’s primary goal. An approach built around your life’s priorities. It’s time for financial strategies that put your needs and priorities front and center. Adapting the approach as life changes and goals are reached. As goals and priorities change, so does your approach.”

“John Thiel, the head of Merrill Lynch Wealth Management, included his views on working with the company on the website, too,” Lazaro told the group, and read his statement:

“Our organization has all the tools and technology and ease of use that you could want. But ultimately, the real measure is when you sit down with your advisor and build that trusting relationship. At any time, you know exactly where you stand when you think about progress towards what it is you want to accomplish with your finances and with your money. Our entire company’s purpose is to help you achieve the best life for yourself and for your family.”

Wells Fargo, Lazaro told the group, wants its customers to feel their “best interests are our top priority.” In relevant part, the website says: “A healthy relationship with your financial advisor should make you feel that your best interests are the top priority no matter what is happening in the market, and no matter the size of your portfolio. Furthermore, you should like your advisor, and both you and your advisor should feel that all concerns are heard and addressed.”

“In every one of these cases,” Lazaro summarized, “the firms presented an image to the public that they will work with the customer to reach their financial goals. You’re in good hands. We will not rest. Meeting your needs. Committed to maintaining the highest standards of integrity. Ethically obligated to act with your best interests at heart. Build that trusting relationship. Integrity. Acting in good faith. Your best interests are the top priority. We can help you reach your goals.

“If you were a customer, looking at these websites, what would you think?” Lazaro asked the group. “What type of relationship would you think you were getting when you were going to work with these firms?”

So, okay, the brokerage firms are offering an advice relationship to their customers; advice is clearly central to their model. I think most of us were expecting Lazaro to press the case that these firms should register their relationship-hungry, high-integrity, your-best-interests brokers with the SEC as RIAs, as the law plainly requires. (None of these advice-related promises sound incidental to some other activity, do they?)

But instead, Lazaro reported on some data that most of us never see: the experiences of plaintiff attorneys in arbitration hearings-the only venue that customers who have been ripped off have the option of appealing to.

“Every single one of these firms said the same thing when they were sued in arbitration for breach of fiduciary duty,” Lazaro told the audience: “that a broker does not owe a customer a fiduciary duty. A broker’s duty is limited to executing a transaction that the customer has authorized.

“The firms took no responsibility past making the recommendation,” Lazaro continued. “So long as the recommendation was suitable, and matched the customer’s investment objectives, their responsibilities ended. They had no responsibility for their advice or lack of advice. They shifted that responsibility to the customer, because the customer approved the transaction, notwithstanding the perception they created by their own actions, their titles and their advertisements. They said that all they were doing was executing the transactions.”

And they got away with this? Evidently, in the FINRA arbitration system, the fact that these advice-giving, relationship-seeking brokers had not registered as RIAs was proof that they should not be held to a fiduciary standard. They got to tell their customers one thing, and then be held to a very different standard when their brokers got a little too greedy.

This finally explains why the brokerage firms are so adamant about not registering their brokers as RIAs. Registration would require them to live up to, in arbitration hearings, the advertising they promote to the public. They would have to give up the clearest example of bait-and-switch in the U.S. business sector.

Of course, the brokerage firms enjoy a home court advantage in the form of a credulous arbitration system, run by their subsidiary called FINRA. “We found that arbitrators don’t understand the distinction in responsibility or the circumstances under which a broker may be held to a heightened obligation, or the special circumstances when a broker should be held to a fiduciary standard,” Lazaro told the group. “Generally, it is permissible in arbitration for a broker to provide conflicted advice if the broker can argue that the transaction was suitable for the customer, even when that broker should be held to the higher fiduciary duty.”

Recently, I came across a terrific view of exactly how the incentives work on Wall Street, courtesy of Tom Nally, CEO of TD Ameritrade Institutional. Take a look at the accompanying chart, published by On Wall Street, a magazine that serves the brokerage world. The magazine profiled the “Top 40 Advisors” who happen to be under the age of 40. Right at the top of the list is a Morgan Stanley broker who managed to generate $9.5 million in commissions on $441.6 million in client assets.

Now turn your attention to number 40 on that list, another Morgan Stanley broker who has even more client assets ($552 million), but who only managed to generate $2.575 million in commissions off of that asset base-just a quarter of the money the number one “Top Advisor” is raking in.

What do you suppose that broker down there at #40 would have to do to move himself up to the top spot, and become the number one broker (the way Wall Street, and the magazine, measures people)? The answer is not: get more assets in the door. It’s not: do a better job of serving clients. It’s: take in a higher percentage of your clients’ money. Sell investments that carry higher incentives. Boost your gross dealer concessions on the existing client base.

The SEC is taking its time on the harmonized fiduciary rule, and meanwhile allowing Wall Street to continue to bait and switch the public, evade consequences in arbitration, and have it both ways. The industry tells the public it’s on their side, and then tell the credulous arbitrators that it only engages in arms-length transactions with willing buyers of what it’s selling. It trumpets trust and doing what’s right for the public, and then its own industry magazine gives accolades to those who can turn the highest percentage of client assets into commissions.

And it has drawn a line in the sand on having its brokers-despite the very public promises that you can trust them-register as RIAs. Will the SEC give in on this issue? If it does, then it will have clearly forfeited its role as a guardian of the investing public-and, sadly, nobody will be surprised.