August 2, 2010
The SEC has a weighty decision to make which may well determine whether middle class Americans have access to reasonably priced financial services to build their financial security. The decision is whether to apply a fiduciary standard to registered representatives of broker dealers.
I cannot support such a decision because it will limit investment choices for most of our 30,000 clients. Why? Because it will lead to unintended market outcomes as it is impossible to comply with on a prospective basis. It will be judged by out of control trial lawyers on an "after the fact" basis.
On the other hand, suitability is an objective standard that has had 75 years to mature since it was adopted in the 1930's. Nothing has shown that another standard will do a better job of protecting the public from a truly unscrupulous representative.
I must observe that Bernard Madoff, as well as others in the news right now, were fiduciaries and Investment Advisers. Their victims got little financial satisfaction from the fiduciary standard. The key is to have a regulatory system that stops the bad financial trade before it is submitted. The suitability system does a much better job of doing so. Madoff could not have perpetrated his crime if he had done it through his broker dealer, as too many people would have to have been complicit. He smartly chose the lightly regulated Investment Adviser side where he was about 1/10 as likely to be examined by the SEC as he would have been by FINRA.
I have already taken a professional oath to treat my clients as I would treat myself if I were in their situation. I don't need a new standard of care.
If a fiduciary standard passes I will only accept clients with $1 million plus accounts and will not allow my reps to accept anything less. The financial risk and cost of compliance will force this outcome and middle class America will no longer have a choice to receive face to face assistance with their decisions about setting up a college savings, retirement or wedding fund, or a strategy to create predictable income in retirement. Don't be the cause of such a terrible outcome.
Many of you have never actually run a business for that needed to be profitable. You may not recognize that investor perceptions of what they wanted change with the outcome of their investment. The suitability standard correctly requires both parties to record those facts and objectives at the time of purchase. Once an investment performs (positive or negative) investor recollections change. The amount of paperwork we currently require of an investor to establish suitability creates a large cost and burden for us and therefore on the small investor. A fiduciary standard will put that cost out of reach as the cost/benefit ratio will swing against servicing the small investor. Just as it is very difficult to find obstetricians willing to deliver a baby today due to the liability cost and concerns.
A duty to "act in the best interest" of the customer is vague and undefined. Do you meassure it by price? By safety rating of the insurance carrier? By product features? By lowest investment expense? By liquidity? By income generated? All of these will be judged after the fact and one or more will be found wanting in any investment that did not perform well for the investor. I will not play in such a game.
Lastly, if you spent time analyzing the industry, you will find that the "independent" RIA's are having a difficult time transferring their businesses to the next generation. They may be great asset managers, but most are poor trainers of people. They came from a proprietary firm and left in midlife to start their own firm. A fiduciary standard will have a natural bias against proprietary products, which are a necessary ingredient in regenerating a trained field force to service the next generation of Americans. The largest independent firms, many of whom are affiliated with an insurance carrier, will no longer bear the cost and risk exposure of a broker dealer if they are likely to be sued for selling a proprietary product. Yet it is just these firms who do the best job of fulfilling the needs of middle class America. You will have designed a perfect regulatory system to deny financial services choices to middle class America.
Our firm already voluntarily discloses any conflicts of interest in our suitability model through a document called "Connecting You With The Right Investment Choice." Consumers are smarter than you give them credit for. They make their buying decisions pretty well. The vast majority of reps try to do what is right for the client.
You need to encourage both the SEC and FINRA to raise the threshold of punishment on those few bad actors who knowingly seek to abscond with client funds or put them in Ponzi schemes. Quit worrying so much about whether an A share or a B share is what consumers need. Consumers judge well what they need. They need to be protected from the crooks and you,unfortunately, have shown that you do that poorly. That is, by far, the greatest harm to consumers. Focus there first. A good dislosure document will give consumers a basis for deciding with whom they wish to do business.
Please take these comments to heart and give middle class America the choice of a lower cost, effective, suitability standard of care. Thank you.