July 28, 2010
My comment relates to the issue of the sorts of standards and rules/regulations that ought to apply to broker/dealers and RIAs who give investing advice.
1) At present, RIAs have been deemed to have a "fiduciary" duty to those to whom they give investing advice. Contrarily, broker/dealers have had a "suitability" rule -- that their "advice" to the public must be "suitable" for those receiving the advice.
2) The meaning of the RIA's fiduciary standard is quite clear -- that advice must be what the RIA believes to be in the client's best interest. However, the meaning of the current broker/dealer's suitability standard is quite a bit less clear. In practice, what is suitable for the broker/dealer is anything that isn't provably "unsuitable". However, a case could be made for the suitability of virtually any investing product for virtually any investor. So in practice, the only things that aren't suitable are those which -- in rare circumstances -- can be proved to be grossly, grossly unsuitable for some particular client. This is the effective current standard for the broker/dealer -- they can sell the public anything that can't be proven to be grossly, grossly unsuitable for them. This is a VERY low standard of care. This exceptionally low standard should NOT be allowed to replace the dramatically higher fiduciary standard which currently applies to RIAs.
3) The broker/dealer industry has become famous for its predatory sales tactics, selling overpriced, unnecessary products to unsuspecting consumers by masquerading as objective fiduciaries. The current broker/dealer rules are used as a "safe harbor" for these commission-crazed broker/dealers -- allowing them to sell their products to the public without fear of regulatory reprimand. This approach has not served the public interest well.
WHAT IS NEEDED IS A SAFE HARBOR FOR THE CONSUMER -- NOT A SAFE HARBOR FOR THOSE WHO DESIRE TO ENRICH THEMSELVES BY PREYING ON THE CONSUMER.
4) There are already effective laws on the books for those giving investment advice. The Investment Adviser's Act of 1940 has been deemed to stipulate a fiduciary standard of behavior for all professionals giving investment advice. It makes sense, from the perspective of protecting the public, to apply this high standard of protection to all those giving investment advice (i.e., it makes sense to simply eliminate the broker/dealer exemption). If a salesperson doesn't want to have the fiduciary standard apply to them, they can carefully avoid any appearance of objectivity or being a fiduciary by simply not giving anything resembling advice (and not using a title suggesting objectivity or advice-giving). If a consumer wants to submit to a sales pitch, that is one thing, but it is quite another for a salesperson to take advantage of a consumer by masquerading as an objective fiduciary in pursuit of a sales commission.
5) The broker/dealer industry has noted that rules in place therein (i.e., applying the suitability rule) are quite a bit more rigorous than those currently in place for RIAs (i.e., applying the fiduciary standard). This is true -- there is virtually no administrative rigor required of RIAs to document fiduciary behavior. Such administrative burden has not proven necessary to ensure that RIAs meet their high fiduciary standard. Likewise, the administrative burden currently imposed on the broker/dealer industry hasn't precluded their continuing to prey on the public.
Applying additional administrative burden (i.e., on RIAs OR broker/dealers) seems unlikely to materially benefit the public. Just requiring them to "do the right thing" has worked out quite well for RIAs and should work equally well for broker/dealers giving investment advice -- so long as regulatory actions are stepped up against those clearly working against a client's best interest.
6) I recommend that the SEC simply eliminate the broker/dealer exemption. This would require ALL financial services professionals giving investment advice to be required to meet the high fiduciary standard of the Investment Adviser's Act of 1940.
Furthermore, the commission will need to step up enforcement action -- to ensure that broker/dealers cease their "business as usual" predatory sales practices built on deceiving the public.
Eric E. Haas
Chief Investing Officer
Altruist Financial Advisors LLC