August 2, 2010
The suitability standard governing broker-dealers and registered representatives is a robust and heavily enforced standard. The fiduciary standard governing investment advisers is applied and enforced.
#61607 Compliance costs-both in terms of finances and time-are high, and those costs are eventually felt by clients. Adding another layer of regulation means another layer of compliance, and even more cost to clients.
o We hold specific licenses which involve many hours of continuing education including requirements for ethics in complying with each license.
o We have a high frequency of being examined right down to each company's suitability department, another layer of protection for the consumer.
o Each communication with clients and the public must go through our own compliance departments and is costly on time. The paperwork itself that is involved is quite laborious. We have you had to designate someone into your office whose job description included keeping up with compliance.
o Compliance is important for consumer protection, but if we spend more time in that area, we have less time to spend with the client, personally.
o Our job is to serve our clients' needs and because of the mistakes of few, you are making it more difficult for everybody, including those who are not ethically challenged.
#61607 The liabilities of a fiduciary duty could mean increasing costs and decreasing our ability to serve our clients.
o Will moving to a fee-only model result in better, unbiased advice? Absolutely, emphatically, NO.
o I am fearful that those of us on the "front line" are not being consulted as the regulations are being consulted directly.
o Lastly, maybe this is solely my opinion, but when commission based folks have their backs against the wall to perform for the production they must get in order to feed their families, that is when you have problems. Put the pressure on the companies themselves to change their models so that the fall-out ratio from this industry is no longer 98% after a certain number of years. It is too difficult to succeed in this business the way some of those companies have it set up.
As has been widely reported by NAIFA and the media, we played a leading role in working with Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) to include the SEC study in the recently-passed Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of the study is for the SEC to conduct the first ever comprehensive analysis of the regulatory environment governing broker-dealers and investment advisers and to determine if any regulatory gaps or overlaps exist that are harmful to consumers. Without the study, Congress was set to move forward with imposing a legal fiduciary duty on all broker-dealers and their registered representatives who provide advice to clients. The premise behind the effort is based on the perception that the fiduciary duty governing investment advisers provides greater investor protection than the suitability standard governing broker-dealers.
What This Means:
The study provides an opportunity for NAIFA members who are registered representatives to explain to regulators how the suitability standard is applied and enforced in the real world versus the fiduciary duty governing investment advisers. The goal of this effort is to give regulators their first ever look into how regulations trickle down from the SEC, through FINRA, broker-dealers, and then on to Main Street professionals like you. Based on the feedback the SEC receives, the Dodd-Frank Act requires the SEC to write rules to address any gaps or overlaps in regulation that are found to be harmful to consumers. Following the study, the SEC is poised to impose a fiduciary standard on broker-dealers and their registered representatives unless your public comments convince them otherwise.
What the Fiduciary Standard Could Mean for NAIFA Members:
The Dodd-Frank Act permits the SEC to require that all broker-dealers be held to the same legal fiduciary requirement investment advisers have when providing advice to clients. Should the SEC choose to use that authority, the fiduciary duty as defined by the Dodd-Frank Act would require that all broker-dealers be held to a legal and vaguely defined standard "to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice."
While NAIFA members believe they are already acting in the "best interest" of their clients, the Act does not define what the rules are for compliance with a legal "best interest" standard - thus subjecting registered representatives to the potential of never ending lawsuits. For example, is "best" the cheapest recommended product? The "best" premium relative to the benefit of the product? The product with the "best" historic underwriting and service standards? Is it the one from the carrier with the "best" rating? The fiduciary standard in essence adds a vague legal liability standard that looks back (sometimes after many years) and is enforced after the fact by the SEC or trial lawyers who have perfect vision in hindsight.
Fortunately, due solely to NAIFA's vigorous efforts, the duty as defined by the Act does include some key limitations that prohibit a regulator from holding a registered representative in violation of the "best interest" standard simply because they receive a commission or recommend to the client to purchase a proprietary product.