Desperate to avoid looking like villains, brokers and insurers seeking to dismantle a requirement that they act in their clients’ best interests want you to believe that their real motive is to replace a flawed rule with one that is much better.
This is a classic bait and switch.
In this case, financial firms’ “something better” refers to a supposedly “uniform” standard for brokers and investment advisers adopted by the Securities and Exchange Commission (SEC), rather than the Department of Labor (DOL) rule, which “only” applies to retirement accounts.
Sounds great, right?
There’s no question this approach would be great for financial firms seeking to hold on to the billions in profits they earn each year by recommending the investment products that are most profitable for them rather than those that are best for their customers.
But repealing the DOL’s fiduciary rule and relying on the SEC to replace it would be a disaster for working families and retirees who need investment advice they can trust, and not just a sales pitch dressed up as advice.
Here’s why.
1) An SEC rule wouldn’t apply to all types of investment advice.
Here are just a few of the things that wouldn’t be covered by an SEC standard: advice about insurance, advice about Fixed Index Annuities, advice about other non-securities investments, such as gold and artwork, where some of the most abusive sales practices are seen, and advice to small business owners seeking help in setting up workplace retirement plans.
All are covered by the Department of Labor’s fiduciary rule, albeit only for retirement accounts.
The point is not that an SEC rule isn’t needed. It is. But it is simply wrong to claim, as industry lobbyists do, that an SEC rule would be a broader, more inclusive standard than the DOL’s. In reality, the SEC just occupies a different circle in the Venn diagram of regulatory responsibility for investment advice.
An SEC standard is needed to supplement the DOL rule; it can’t replace it.
2) An SEC rule wouldn’t apply to the full range of services investors perceive as advice.
Those who argue for this SEC-led approach have played fast and loose over the years with the definition of “personalized investment advice” to which such a standard should apply. While SIFMA once offered a fairly inclusive definition, their recent statements in both their DOL comment letters and legal briefs, like those of their fellow rule antagonists, have called for a very narrow application of the best interest standard.
Based on their efforts to dramatically narrow the application of the DOL rule, there’s no reason to believe the alternative best interest standard industry lobbyists are pushing now will apply to the full range of services investors perceive and rely on as trusted advice.
3) It won’t be a real best interest standard.
One reason securities firms are so anxious to have SEC take the lead is that they’ve seen how the SEC applies a fiduciary standard to investment advisers and they greatly prefer its less rigorous approach. As enforced by the SEC, an adviser’s best interest standard is virtually indistinguishable from a broker’s suitability obligation, and even the most egregious conflicts are permitted as long as they are disclosed.
That may work reasonably well for the many advisers who operate with minimal conflicts of interest, but it would be a disaster if applied to the brokerage industry’s conflict-laden business model.
In drafting its rule, the Department of Labor recognized that if you want sales-based financial advisors to act in their customers’ best interests, you have to eliminate practices that encourage and reward advice that is not in customers’ best interests. That includes things like paying advisors dramatically more to sell one product over another or using quotas and bonuses to encourage the sale of in-house products.
Financial industry lobbyists have continued to voice strenuous objections to these “unworkable” restrictions, even as individual firms have shown they can adapt and are doing so in ways that deliver tangible benefits to investors. There’s no way they’d support an SEC rule that included similar restrictions.
4) It won’t ever happen.
The above concerns pre-suppose that the SEC will actually get around to adopting an industry-supported fiduciary rule. But the SEC has failed to act on a “uniform” fiduciary standard under leadership that is far friendlier to regulation than the current Administration. There’s no reason to believe it will do so now.
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Ultimately, it comes down to this: broker-dealers and insurers really don’t want to be legally accountable under a standard that requires them to act in customers’ best interests. But they also know it will look bad in the eyes of both customers and policymakers if they admit that publicly.
That’s why they’ve come up with this bait and switch scam. Investors who really want best interest advice shouldn’t buy it.