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Why Force the Inevitable?

The question of the hour, in planning circles, in this new year, is how to navigate the lobbying and advocacy efforts around the fiduciary standard going forward. As you know, the SEC is still studying whether to apply a harmonized fiduciary standard on advisors and brokers, and there have been numerous efforts by FINRA to become the regulatory body for RIAs. There have been fitful efforts in Congress to prevent the brokerage industry from having to change its business model, which (call me a cynic) may have been influenced by daily visits from lobbyists offering generous campaign contributions.

At the recent TD Ameritrade conference, in a panel discussion on these issues, Knut Rostad, president and founder of the Institute for the Fiduciary Standard, made a plausible case that the fiduciary standard is in more danger today than it was when the FPA filed its lawsuit against the SEC, or when the advisory community successfully lobbied Congress to include fiduciary provisions in the Dodd-Frank Act. In other words, after raising this issue and pursuing it with all our resources, we are actually worse off than we were before.

The obvious takeaway is that what we have been doing has not been working, and we need to rethink our strategy. It seems to me that the main result of pushing to require brokers to register with the SEC and/or live up to a fiduciary standard has been a tremendous amount of push-back from an industry that is better-funded than we are, to the point where we have precipitated a real danger to the fiduciary standard itself.  Most people I talk with agree that the most likely outcome, if we press the issue, is a blended standard that will make it harder (not easier) for the public to distinguish a sales agenda from a professional advice model.  

I'm pretty sure that is not what we intended when we started this fight.

What could we do differently? I suspect that if the fiduciary RIA community were to stop poking sticks in the eye of the wirehouse bear, it will stop roaring and threatening and thrashing around and leaving bags of money in Congressional offices, and settle back down to what it was doing before: subtly undermining the distinctions between brokers and advisors.  Those distinctions, as they exist today, can be made clear to the public in discussions and through the press–and that may be what we have to settle for–at least for now.  My assumption, which may be wrong, is: If we don't force the issue, then we will eventually prevail in the marketplace and the winner will be the consumer public. If we do force the issue, we may not get what we are hoping for.

Meanwhile, I think we need to continue to treat FINRA efforts to regulate the RIA community as a joke in poor taste, and fight every FINRA initiative with a blizzard of facts about its shortcomings, lack of transparency, stubborn historical opposition to fiduciary standards, huge salaries, poor record of preventing manifest abuse of consumers etc. etc.  And the big one, which isn't getting a lot of attention: are we really going to let an organization decide that it will be the self-regulatory organization for a group of professionals who vehemently don't want it to be?  Is that the true spirit of self-regulatory activity?

The overarching goal of this change in strategy is to lose no more ground that we have lost already, and then gradually retake some of that ground incrementally through public education as the battle settles down to the stalemate we had before we started this war. As things stand now, we are clearly not going to win in the SEC, or in Congress. I am confident that the brokerage world will precipitate another round of scandals within the next ten years, and lose even more credibility, which would give us all a teaching opportunity and a chance to gain ground more quickly without a huge lobbying cost.

Call it a retreat, or guerrilla warfare if you want, but in retrospect, marching in a frontal assault against a better-equipped army is starting to look like a losing game plan–not just for us, but more importantly, for all the consumers that a clear (and now endangered) fiduciary standard was created to protect. I think the fiduciary RIA profession is destined to win this war in the end–but only if we don't screw up in the meantime.