Catch the Updraft

I’m beginning to think that the idea of pursuing state regulation for financial planners isn’t so bad after all.

The consensus opinion right now is that any additional regulation of investment advice and financial planning at the state level would be an utter disaster, because it would force advisors operating in several jurisdictions to conform to different and potentially conflicting rule regimes. 

This opinion has some merit to it; many states object to the term “retainers” in reference to a flat fee revenue model, while at the federal level, the SEC has no problem because it understands the difference between the term as advisors use it and as attorneys do.  Also, some states regulators seem to believe advisors paying clients’ trading costs out of their own pockets is potentially deceitful, since it gives advisors an incentive not to make trades and adopt a buy-and-hold approach that they regard as neglecting portfolio oversight.

Point made.  But I find it increasingly interesting that our consensus opinion against lobbying at the state level also happens to be the consensus of that arch-nemesis of fiduciary planners: the wirehouses.  I’m also noticing that the push for meaningful consumer protection is increasingly robust at the state level and retreating in Washington.  Securities regulators in Nevada, New Jersey, Maryland and Massachusetts have been pushing for various versions of a true fiduciary standard in their jurisdictions, while the spineless SEC seems have a bad fiduciary allergy and appears to be taking its marching orders from the corner offices of prominent Wall Street firms. 

So I ask myself (and you): Could lobbying at the state level be any worse than what we’re getting from Washington?

I actually think it could be much, much better.  Here’s why: while the SEC slips ever-deeper into the control of the brokerage industry, and Washington politics becomes purely a matter of who’s willing to lay more money in the table, state regulators and a surprising number of state legislators seem to be genuinely concerned about protecting their citizens.  When there’s an ugly scandal at the local level, perpetrated by a large brokerage firm headquartered out of state, it becomes easier to talk about common sense regulation and how a fiduciary standard would clean up the streets.

Yes, but… wouldn’t large bags of brokerage lobbying money go further in these other smaller jurisdictions?  I used to believe that, but now I wonder.  If there are 50 fires to put out, would the brokerage lobbyists win in all 50 states?  They would have to, because once one state mustered the courage to halt predatory sales activities with a tough fiduciary standard, other states are going to wonder why their citizens are not receiving such protections—and their more idealistic state representatives are going to bring this up in session.  State pride would be on the line.

The interesting example here, to me, is the marijuana laws.  There is nothing quite so polarizing as legalizing a recreational drug which, until recently, carried a life sentence for possession in Texas, while people in Colorado, Oregon and California toke freely on the streets.  The federal regulators, noticing the lack of police cooperation in these pot-friendly states, finally threw up their hands and gave up enforcement of the recreational marijuana laws still on the federal books.

This is where it gets interesting.  Colorado and Oregon began the pot experiment, and they looked like lone wolves out there for a time, collecting their tax revenues and somehow not turning into drug-infested hellholes.  Then they were joined, eventually, by the great states of Washington, Nevada, California, Michigan, Alaska, Maine, Vermont and Massachusetts.  Does anybody think that New York, Connecticut, Maryland and Ohio are far behind?  And as a growing number of states begin collecting taxes from pot sales that were previously off the books, does anybody think the others won’t eventually follow suit?  Or that, once they do, the federal laws won’t grudgingly change as well, regardless of how many lobbying dollars are stuffed in shirt pockets?

What does that have to do with a fiduciary standard?  It looks to me like the states watch each other, and seek out the benefits that other states have managed to take advantage of.  California and New York appear to be early-adopters of consumer protections, and other states, grudgingly at first, eventually follow along.  In other words, I think a potentially-beneficial trend in the states, once something like the fiduciary standard takes hold in one or two influential locations, will gather steam—exactly the opposite of what is happening at the SEC.

The CFP Board and NAPFA appear to be enthusiastic about the fiduciary standard initiatives, but much less so regarding financial planning regulation—and you can understand the logic.  Financial planners already feel a wee bit over-regulated and nit-picked about their investment advisory activities.  Do they really need somebody telling them how they can and cannot recommend a Roth conversion or build a planned giving strategy?

Fair enough.  But if financial planning is ever going to become a profession, it will need to be regulated to the point where the top seller of annuities in the local branch office cannot call himself a financial planner.  I cannot, under state law, call myself a doctor and dispense medicinal remedies.  I should also not be allowed to call myself a financial planner without proper credentials. 

My point is that we probably ought to keep a careful eye on this interesting fiduciary trend that is going on at the state level, and encourage it where we can.  If indeed the states start gravitating upward, and fiduciary becomes more common with more states (to the dismay of the SEC, FINRA, SIFMA and the FSI), then we might want to harness that state updraft tendency for financial planning regulation. 

You know that regulation is coming sooner or later.  Perhaps if we can introduce the best possible (non-nitpicky) regulatory regime at the state level, it, too, will propagate in a way that is beneficial to the profession.

Leave a Comment