Skip to content

While the Iron is Hot…

While Ann Wagner shills for the brokerage industry, and introduces bill after bill in Congress that would weaken the DOL Rule and the fiduciary standard generally, the profession needs to get in front of the REAL fiduciary impetus and help NASAA draft model state legislation.

You may have read that the states of Nevada and Connecticut have already passed laws that expand fiduciary requirements for people who give investment advice (prominently including brokers), while legislatures in New York, New Jersey and Massachusetts are mulling similar measures.  The states are responding to investor disappointment in what can only be described as extremely weak federal regulation of brokers and insurance agents, and new awareness of their predatory activities.  In the past, the SEC’s gentle coddling of the brokerage world, and FINRA’s cynical efforts to pretend to protect the public, were invisible to the consumer’s eye.  The newfound awareness is almost certainly a result of all the publicity surrounding the Trump Administration’s efforts—and those efforts in Congress—to roll back the DOL Rule.  It’s strikingly revealing when an industry furiously lobbies against what seems like an obviously fair proposition: give advice that will benefit the recipient of that advice. 

State securities regulators have historically been far less conflicted and “captured” than the SEC, and have been on board with the idea that advisors should manage or avoid conflicts from the beginning.  But at present, they don’t have anything resembling a unified position on what a fiduciary law should look like.

The logical group to propose model state legislation is the Financial Planning Coalition—made up of NAPFA, the FPA and the CFP Board.  The three have been reluctant to engage at the state level, however, out of fear that a hodgepodge of different laws would emerge from their efforts, forcing advisors with clients in five or 11 states to adhere to potentially very different regulatory regimes.  However, the concept of fiduciary, if written in the form of principles, is different from requiring different kinds of paperwork; you provide advice in the best interests of the client and are prepared to show that you did so if challenged.  Scrutiny by NASAA members is going to be more intense around recommendations where sales commissions are involved; if there’s no incentive to give conflicted advice, the advisor who avoids conflicts ought to sail through whatever patchwork the states create.

And of course, the point of creating model legislation is to gain as much standardization as possible.  To see how this can be unobtrusive yet powerful, look at the various subtle differences among different states’ versions of the Uniform Prudent Investor Rule, mostly passed in the 1990s.  Follow the principles and you follow the law.  The rules are not terribly different from state to state, and no additional compliance hassles were created.

The bigger question, which ought to be addressed at the same time, is: can the states also protect the terminology that brokers and planners use?  For instance, could states require people calling themselves financial planners to be fee-only and adhere to certain standards of training?  Could brokers be banned from describing themselves as “financial advisors” when soliciting customers?  Should commission-compensated insurance agents be required to disclose their professionalism in sales rather than in advice?

Right now, the proverbial iron appears to be hot.  State regulators and legislators are dismayed that a layer of consumer protection is being systematically dismantled before it ever had a chance to work.  They see the SEC as toothless and solicitous of the sales organizations, and ostensible constituent representatives like Ms. Wagner willing to do whatever the brokerage industry tells them to do next.  If state legislators are going to be acting anyway, shouldn’t the Coalition be involved in the conversations?