Congress Again Favors Big Money Over Small Investors

Congress Again Favors Big Money Over Small Investors

If you have an investment portfolio at Merrill Lynch these days, you don’t deal with a broker but with a financial advisor. Often, that individual has the letters CFA (or some other credential) after his or her name to tell you that he or she has invested time and energy in acquiring the latest knowledge about how to construct a portfolio, help a client plan for retirement and meet other financial objectives.

Odds are that this ex-broker/newly minted advisor is indeed holding himself to a higher standard of behavior. These days, it’s only the bucket shops that diligently cram a client’s portfolio full of risky securities and then trade them, pointlessly, in order to generate commission revenue for the broker and the firm. But that big bank “advisor” – and it’s true not just at Merrill Lynch – still doesn’t adhere to the standard of a “fiduciary.”

Now, another attempt to apply that higher standard more widely, and to protect more small investors, has fallen victim once more to Wall Street lobbying.

Before we get to that story, let’s make clear why the fiduciary standard matters. In legal terms, it means that no matter what fancy name they might want to call themselves – whether it’s planners, brokers or advisers – financial professionals would be required to put their clients’ interests above their own or those of their institution. Advisers who aren’t fiduciaries are required only to ensure that an investment is “suitable” for their client, not that it is the best of all possible solutions.

Sometimes you’ll hear such an advisor saying that they behave “as if” they were a fiduciary. But a difference – a big one – remains. As Harold Evensky, one of the advisers who has been campaigning for an industry-wide common fiduciary standard for many years, put it in a submission letter to the SEC earlier this year, when you’re a fiduciary, the buck stops with you. If your duty is one of “suitability,” then it’s up to the client to double check and monitor. “The advisor’s duty of loyalty is to the firm, not the client,” Evensky wrote.

In practice, you may never notice the distinction. It’s true that many brokers and bank-based advisers go far above and beyond the level of care required of them by the current rules. Still, if your advisor isn’t acting as a fiduciary, while the risk of being ripped off is, in all probability, minimal, you’re running another risk: that you’ll end up in a slightly more costly investment product. And if you do end up with a problem with your advisor, you’ll find that you have two very different options, depending on which category that individual falls into. Advisors with a fiduciary duty to their clients are registered with and overseen by the SEC; those adhering to the suitability standard are governed by the Financial Industry Regulatory Authority, or FINRA, a self-regulatory industry body. If you’ve got a problem, which group is likely to be more receptive or responsive?

Evensky’s goal is to get everyone who provides personalized (as opposed to generic) investment advice to adhere to that higher fiduciary standard. If the idea of introducing a common fiduciary standard sounds as straightforward and appealing as apple pie, the process has been anything but.


Ironically, the very efforts made by the big financial institutions to mask the fact that their employees don’t adhere to that standard – such as the changes in name – are now being cited by the industry and some members of Congress as reasons for not pushing ahead with this as law. Consumers are confused, they argue, and introducing a new standard would simply exacerbate that confusion.

Moreover, the big broker dealers argue that requiring them to adhere to the fiduciary standard would raise the costs of doing business, given the magnitude of the change to the business model. Some opponents have warned that the fallout might hurt smaller investors, who would be less attractive as clients. And, opponents add with a flourish, not all their clients want or need this level of care, especially if it comes at the cost of “freedom of choice.”/>

Rep. Ann Wagner, R-MO, has clearly been listening carefully to Wall Street. She penned House of Representatives legislation approved by the Financial Services Committee last week that would require the SEC to pass its own rule adopting the more rigorous fiduciary standard before a similar Labor Department rule could kick in. That legislative twist that means any attempt to implement an industry-wide fiduciary standard will be still further delayed. Wagner has scoffed at the idea that this is an area that needs reform, noting that the fiduciary standard is “a solution in desperate search of a problem.”

This all may sound like an arcane debate. In part, that is what Wall Street is counting on. Its managers don’t want to incur the added risk of being more accountable to the general public, or the added costs of reshaping their business model (or face the prospect of seeing their margins vanish on investment products that can be deemed “suitable” but that wouldn’t pass muster under a mandatory fiduciary standard). Indeed, the more arcane the debate, the better, because that is when comments like those by Rep. Wagner can go unchallenged.

In truth, the big bank’s concerns over proposed reforms may, in part, be based on false assumptions. In a study published in the Journal of Financial Planning, Michael Finke and Thomas Langdon (professors at Texas Tech and Roger Williams University, respectively, and both certified financial planners) found “no statistical differences” in the ability of fiduciaries “to provide a broad range of products (or) the ability to provide tailored advice (or) the cost of compliance.” In comparing states that already have a fiduciary duty requirement in place and those that don’t, they also couldn’t find any significant difference in the percentages of clients with high net worth. That all suggests that the big banks wouldn’t suffer too much from adopting the higher standard.

This is a debate worth monitoring, because when things go wrong, you’ll find it makes a big difference whether your financial adviser is considered to legally have a fiduciary duty to you. And while you’re pondering these questions, it’s worthwhile posing the question to them so that you know where you stand. And if they don’t have a fiduciary duty, maybe it’s worth the extra time to get them to explain why that is better for you?