Are brokers being branded with a scarlet ‘S’?
March 27, 2015 by Mark Schoeff Jr.
Given the direction the debate is heading over whether to raise investment-advice standards for brokers, it could end up being solved by requiring them to wear a scarlet “S” for suitability.
As the Department of Labor moves toward re-proposing a rule that would require brokers handling retirement accounts to act in the best interest of their clients — and the Securities and Exchange Commission deliberates about a similar rule for retail investment advice — the rhetoric surrounding the regulatory activity is hitting brokers hard.
“The language being used seems a bit harsh,” said Juli McNeely, president of McNeely Financial Services. “I don’t see one business model being better than the other. They’re different for sure. They both have their place.”
In advocating for a fiduciary standard, proponents have been blatantly critical of brokers. In fact, the broker shaming reached a new level this week, when New York City Comptroller Scott Stringer launched a proposal to enact in state law a financial-advice verbal and written disclosure that would clearly separate fiduciary and suitability advisers. The language Mr. Stringer wants brokers to recite at the beginning of a customer agreement and throughout the relationship is bracing:
I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you.
“I don’t think it’s reasonable to assume that someone working under a suitability standard is a crook, and they shouldn’t have to tell a client they are,” said Amy Webber, president of Cambridge, an independent broker-dealer. “It’s unfortunate that the policymakers are reading too much into what a regulation can do in the real world. Both sides can come to the table to do what’s right for the client.”
Criticism of brokers got its highest profile from the bully pulpit in February. When President Barack Obama directed the DOL to move ahead with its rule, he pulled no punches against brokers.
“There are a lot of very fine financial advisers out there, but there are also financial advisers who receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns,” Mr. Obama said in a February 23 speech at AARP. “So what happens is these payments, these inducements incentivize the broker to make recommendations that generate the best returns for them, but not necessarily the best returns for you.”
Investment advisers currently meet a best-interest, or fiduciary, standard. Brokers adhere to a suitability rule that requires them to sell investment products that meet a client’s needs and risk tolerance but may carry high fees, for example.
At the event, Mr. Obama highlighted a registered investment adviser, Sheryl Garrett, and praised her as being among advisers “who do put their clients’ interests first.”
He then pivoted to slam brokers.
“The system makes it harder, in fact, for those financial advisers like Sheryl who are trying to do the right thing, because if she’s making really good advice but somebody who is competing with her is selling snake oil, she’s losing business,” Mr. Obama said.
It almost sounds as if brokers, who are operating legally and presumably trying to help their clients increase their assets, should be ashamed of what they do every day.
“I would never apologize for what we do,” said Rick Carlson, president of Carlson Advisors. “I know we’re providing exceptional advice on a cost-effective basis for our clients.”
Dean Harman, owner of Harman Wealth Management, operates under both a fiduciary and suitability standard. Most of his clients are in fee-based accounts. But he doesn’t agree that the fiduciary rule is more stringent than suitability.
“There’s an attempt to politicize this,” Mr. Harman said. “To put brokers and advisers under a cloud of suspicion is unfair, especially with all the regulation we have anyway. Even the suitability standard is high.”
Adding insult to injury, a report by the Public Investors Arbitration Bar Association this week compared brokers to used car salesmen.
But Joe Heider, founder of Cirrus Wealth Management, who practices under both a fiduciary and suitability standard, said the same principle of client interaction applies to each.
“The most valuable asset [advisers] have is the relationship and the trust of the client,” he said. “When they lose that, they get fired and they lose all revenue opportunity.”
The DOL has said the fiduciary rule is needed to protect workers and retirees from conflicted advice — and losses that amount to $17 billion annually, according to a White House report. Critics say the rule could significantly increase regulatory and liability costs for brokers and price them out of the advice market for middle-income savers.
Ms. Webber, Mr. Carlson and Mr. Harman are all board members of the Financial Services Institute. Ms. McNeely is president of the National Association of Insurance and Financial Advisors. The groups have been waging a battle against the DOL fiduciary rule, but with Mr. Obama leaping into the fray, it appears they’re being outgunned.
A fiduciary proponent denies that his side is trying to humiliate brokers.
“Sales is an honorable profession, if you do it honorably,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “This is not about shaming brokers, this is about telling the truth.”