Monday, August 12, 2013

Guest Post: Knut Rostad - The "Discussion" in D.C. on Fiduciary; Wall Street's Surprising Admission

In this guest post, Knut Rostad, President and Founder of The Institute for the Fiduciary Standard, discusses a recent article in Wall Street Journal and Wall Street's surprising admission. Thank you, Knut, for your continued advocacy in this area, and for the insights you share here.


Yesterday's WSJ column by Jason Zweig captures the essence of the "discussion" in Washington on what "fiduciary" should mean. It is the "discussion" between the Department of Labor (DOL) and the brokerage industry regarding an anticipated DOL rule to modernize ERISA to ensure brokers act "solely for the benefit of their clients when advising on individual retirement accounts." (See link below.) The DOL's rule has NOT been released and its provisions are unknown; it may be released to the public by December.  

Zweig's depiction describes the state of the "discussion," and, unfortunately, evokes NPR's warning to listeners before certain stories: "The topic we are about to explore may not be suitable for our young listeners." Here, substitute "young listeners" with "citizens."  The discussion is very disheartening, clearly "not suitable" for a political system that strives to function effectively.

Assistant Secretary of Labor Phyllis Borzi explains that the "Conflict of Interest Rule" will seek to reduce conflicts of interest in the retirement investment marketplace by, among other things, making "advisers legally accountable for the advice they provide." OK. What's so bad about seeking to reduce conflicts of interest? The brokerage industry replies - plenty.    

The brokerage industry here is represented by the Securities Industry and Financial Markets Association (SIFMA), whose new president, former Senator Judd Gregg, just took the helm of SIFMA recently. Gregg represented New Hampshire in the Senate for eighteen years and became a highly respected member and then Chair of the Budget Committee.  

SIFMA and other broker and insurance groups, none-the-less, have been asserting at the top of their lungs for months and months the new rule -- a rule that they have not seen and they do not know what it may or may not include -- will result in nothing short of devastation.

"Devastation" may be an understatement, if these groups are to be believed.  

Gregg insists, as quoted by Zweig, about the new rule that he and no one else has seen: "It's a dangerously large expansion that would chill all kinds of activity. Its going to be destructive. The folks with small accounts are going to lose the ability to get advice, and their costs will go up."

The DOL seeks to reduce conflicts of interest and the securities industry replies that doing so would be "destructive" and result in "small accounts" having no access to advice or guidance. To this, Borzi replies, "The industry is saying, in effect, 'If you don't allow us to continue to give conflicted advice, we won't be able to give any.'"

The crux of the industry argument is a public admission it can no longer afford to act "solely for the benefit of their clients," as it is legally required to do under ERISA. This admission is not a one-off statement; it has been repeated again and again in various forms. That an industry's central argument against modernizing regulations - that it can no longer do what's right for the client - should be considered, at the very least, an odd admission of a gigantic failure. A gigantic failure when, at the very same time, registered investment advisors (RIAs) ARE apparently doing whats right for the client, or at least not waging a campaign based on their inability to do so. 

Such an admission of a gigantic failure in other industries where competitive market forces matter would have dire consequences for the industry and the those responsible for the failure. Here, in 2013, this admission is apparently believed to be an effective PR strategy.Time will tell. In the meantime, read Zweig's article and decide for yourself.

Jason Zweig's article can be found at: 

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