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The Enemy of Professionalism

In June, SEC chair Jay Clayton issued a request for public input on standards of conduct for investment advisors and broker-dealers, which specifically mentioned the DOL fiduciary rule.  (You can find it here:  If you wish to see who else offered comments, the list is at:  I think just by the way the question is framed, the SEC is preordaining a bad outcome.

How?  The brokerage and professional financial planning world represent different business models, which to my mind means they should be regulated separately under different standards—as, in fact, they are now.  The SEC has ceded to FINRA the regulation of a significant conflict of interest—commission revenue—which provides tangible incentives for brokers, reps and advisors to churn accounts and to recommend unsuitable investments which are more remunerative to the seller than beneficial to the buyer.  People who have voluntarily embraced these incentives need to be monitored carefully for potential customer abuse, and as a result—appropriately—FINRA regulation is more stringent than the regulatory structure for advisors who don’t take commissions and have renounced those incentives.  Years ago, in one of my better lines, I said: show me a broker in the habit of churning customer accounts, take away commissions, and see if he doesn’t break the habit in a heartbeat.

I concede that the existence of these incentives doesn’t, in and of itself, mean that a broker, rep or advisor is acting in a self-interested way; we all know many excellent professionals who take commissions.  But, as we saw in story after story a couple of issues ago, there always seems to be a number of bad apples in the commission world, whose advice bears no relationship to what is best for the client, but just happens to be highly lucrative to the bad apple in question.  The incentives, in other words, get acted on, and they can cause real damage to customers’ financial lives.  Any reasonable regulatory structure has to monitor everybody who embraces these incentives, in order to weed out those who are profiting unjustly from them.

When you try to harmonize regulations among those who live with these potentially perverse incentives and those who have renounced them, you end up with a regulatory structure that over-regulates people who have given up the temptation of commissions, and simultaneously under-regulates those who accept and potentially misuse the temptation.  In the financial services world, one size does not—cannot—fit all.

The SEC seems to operate under a careless definition of “fiduciary,” which suggests that it worries more about the business model of brokerage firms than about the financial safety of consumers.  Instead of doing the bidding of brokerage lobbyists, instead of asking how to split the baby between brokerage and RIA regulation, why not look for guidance to other professions?  The standards of care for doctors, lawyers and accountants all look similar in their deliberate exclusion of conflicts.  Doctors don’t take commissions for the medicines they recommend, and their advice should always be in the patient’s best interests.  Attorneys work strictly for the benefit of their clients, and accountants are held to standards that preclude incentives to fudge the numbers—and receive severe penalties (see: Arthur Andersen after the Enron fiasco) if they stray from that ethos.

Beyond that, corporations, venture capitalists and private equity firms are not permitted to buy law firms or accounting firms.  Doctors have their own rules.  The corporate practice of medicine laws require corporations created to employ

physicians to be incorporated under the state’s professional service corporate laws, and mandate that all stock in the corporation providing the services be held by a physician licensed in the state and all members of the board of directors be physicians licensed by the state.

The reason is obvious: as a society, we don’t want professional service providers, in a regulated profession, putting the interests of the corporation or its shareholders before the interests of the customer or client.  We don’t want the doctor to be worrying about the profitability of the hospital when making life-or-death medical decisions.

Extend this to the emerging financial planning profession, and you see immediately a problem with brokerage firms employing the people who recommend their in-house products, posing as professional advisors.  Purely based on the circumstances of their employment, brokers have a stronger obligation to their company than they do to their customers, which is anathema to professionalism, and ought to be factored into the SEC’s consideration of how different business models ought to be regulated.  Once again, there are brokers who put their customers’ interests first, but time and again we hear from former brokers who felt like they were forced to leave because of their client-first approach to giving advice.

Instead of asking how to mash together the regulation of two business models, the SEC ought to be asking why brokerage firms refuse to allow their company representatives—who call themselves advisors—to register as RIAs with the SEC.  The SEC ought to be inquiring whether the public would be best served by a blanket regulatory structure that doesn’t fit either model, or much greater clarity about who is actually an advisor and who is a sales agent.

It seems like, for my entire 35-year career in this business, the SEC has been complicit in the brokerage world’s efforts to obscure the distinction between brokers and professionals, between advisors who work for their clients and brokers who work for themselves and their firms.  If the SEC were asking honest questions in an honest effort to protect the public, this is where the focus of its inquiry would go.  Until we see that, we know that our chief regulatory organization has been captured by the sales world, and is a stealth enemy of real professionalism.