Regulating Titles

When the financial planning profession proposed that the SEC institute a fiduciary standard across the full spectrum of advice providers, it was really doing nothing more than asking that everybody be required to register as RIAs.  Yes, many dually-registered advisors were acting as something less than fiduciaries when they were recommending non-traded REITs to their customers, but the Supreme Court has ruled that advisors have to act as fiduciaries.  The brokerage firms realized this, even if some of the members of the Financial Services Institute did not, and warily stayed away from registering their sales agents and asset gatherers.

With the benefit of hindsight, the outcome of the fiduciary initiative was predictable.  The SEC, whose staffers hope to someday earn seven-figure salaries as due diligence officers or lobbyists for the brokerage industry, have been open to changing the definition of “fiduciary” to the liking of the brokerage firms.  And the brokerage firms themselves have shifted gears, rewritten history, and declared that they have always supported a fiduciary standard.  This, even though when a fiduciary standard was included in an initial draft of the Dodd-Frank Act, the Congressional representatives were stunned at the ferocity of the opposition to that clause, and took it out fearing that a stronger stand would scuttle the entire bill.

What to do now?  Harold Evensky, of Evensky, Katz Foldes in Coral Gables, FL has proposed that instead of requiring brokers to act as fiduciaries, we regulate what brokers can call themselves.  If they’re offering advice, or primarily market themselves as advice providers (calling themselves financial advisors or financial planners) they should register with the SEC—and warehouse-affiliated representatives should be free to do this if they’re willing to live under a fiduciary standard.  If they refuse to register with the SEC, then they should be required to identify themselves sales agents, sales representatives or brokers.

The idea here is that this would give the general public a much better perspective on the kind of “advice” they’re receiving.  If the person sitting across the table is forced to call himself a “broker,” then the consumer would have a better chance of knowing that there is a sales agenda involved, that the broker may be primarily gathering assets, and that the investment choices may be products that pay generously for shelf space—and probably cost more.  If the person they’re talking with has the freedom to call him/herself a financial planner (my preferred term) or financial advisor, then certain fiduciary protections ought to apply.

As mentioned earlier, there are still significant conflicts within the RIA community.  Mr. Evensky’s proposals would not help the person who meets with a dually-registered RIA who sells non-traded REITs for a living.  And the proposal really doesn’t address the community which most Inside Information readers identified as the primary sources of awful advice that they inherited in client portfolios: certain insurance agents who have a very strong sales agenda and a taste for high commissions. 

But regulating titles is easier than regulating behavior, and it is certainly preferable to allowing an industry to self-interestedly rewrite centuries of common law and redefine the term “fiduciary” in our society.  In a perfect world, the SEC would be looking for better ways to protect the public, rather than the wirehouse business model.  But since we don’t live in that world, I propose that we give the Evensky proposal our support.

Leave a Comment