Ah, Spring, that eternal season of baseball, Easter and turning one's heart to … budget poker? For those without a scorecard, here's the quick recap:
Seventy years ago, Congress passed the Investment Advisers Act of 1940 ("40 Act"). The 40 Act requires anyone (other than banks) providing investment advice to act under the fiduciary standard (as in "the client comes first). This leveled the playing field between banks (whose investment advising trust departments long ago fell under the fiduciary standard) and those (referred to as "Registered Investment Advisers" or "RIAs") who offered investment advice outside the bank trust model.
Since then, new financial services industries, finding loopholes in the 40 Act (q.v., "Merrill Lynch Rule") or finding themselves regulated by others (q.v., the insurance industry), discovered they could nose their way into the highly lucrative investment advisory – (called "advisory" since the "e" applies only to those operating under the 40 Act) – without regard to the fiduciary standard. Unlike RIAs, these advisors follow the less restrictive "suitability standard" (as in "anything but the fiduciary standard").
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This trickle soon became a stampede. Today thousands of "dual registered" – one as a broker; the other as an RIA – financial service providers exist. Dual registration allows these providers to call themselves "investment advisers" (the "e" comes back again) but also allows them to use the suitability standard. As (primarily) larger firms discovered the joys (read "unencumbered profits") of this escape clause in the 40 Act, the rush to dual registration became the industry standard. Once again we find ourselves on an uneven playing field pitting the large firms (ironically, now including banks) and their dual registered broker-reps against the smaller boutique RIAs.
Last summer Congress passed the Dodd-Frank bill. In exchange for giving all those "too big to fail" banks and brokers everything they wanted, the legislators threw a bone to the mom-and-pop RIAs of the world by encouraging the SEC to look into this whole "fiduciary duty" thing.
Dodd-Frank commanded the SEC to investigate and investigate the SEC did. Only, instead of conducting an academic study warranted by the issue's merits, the Commission decided to treat it like one big lobbying festival. When the SEC released the final report, neither side knew who won (for more info, see "SEC Fiduciary Report: Who Won? Advisers? Brokers? Or 401k Plan Sponsors?" Fiduciary News, Jan. 26, 2011). Worse, given the way the SEC conducted the study, approval of the report was not unanimous. The three Democrat Commissioners voted in favor of it while the two Republican Commissioners gave it the thumbs down.
This winter, SEC Chairman Mary Shapiro sat before the now Republican-controlled Congress to set the record straight. Did she focus on the academic aspects of the study? No. She used the hearing to argue budgetary issues rather than the virtues of a level playing field when it comes to offering investment advice. Perhaps playing up on the report's own indecisiveness, Shapiro told Congress although the fiduciary standard benefits investors, the SEC couldn't afford to enforce it without raising its fees to advisers. In essence, she said, "If you want the fiduciary standard so much, you'll have to find out a way to pony up the cash."
What possessed her to believe this bluff would work? The gambit shows two things: 1) the SEC Chairman either doesn't know how to play poker; or, she has a warped view of political reality. Why would she think the Republican congressional majority would de facto desire the fiduciary standard when the SEC's own Republican Commissioners refused to buy into the assumptions of the SEC study? And, if Shapiro really feels the Fiduciary Standard so greatly benefits investors, why does she seem so easily willing to sell it for a few pieces of silver?
Indeed, maybe the SEC should start operating under the Fiduciary Standard – and place investment clients first, ahead of politics.
In the end, it appears Shapiro only gave the Republicans easy cover to call her bluff. And last week, that's what they did, telling her, in so many words, "If you have to ask, you can't afford it."
Fear not, fiduciary aficionado, the SEC Amateur Hour returns as Congress has promised a follow-up hearing "in the coming weeks."
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
