August 13, 2010
I have had the opportunity to work with many clients that have entrusted me with the investment management of their money under the broker suitability rules. I have also watched in my industry as others have managed money under the fiduciary standard rules that you are investigating. My experience has been the the cost to the client, whom you are ultimately trying to protect, is usually not worth the difference in earnings, and in many cases they pay so much for the research necessary to meet that standard that they actually lose a large amount of possible future earnings trying to do so. One friend of mine in this industry that is licensed to help clients under both standards has laughed in discussions about how he is willing to meet the fiduciary standards for his clients, but that it will cost them more and they will not see any benefit from it, but if they choose to purchase that way he lets them. Another financial professional in my area about ten years ago tried to move to a fee based practice and 80% of his clients left him over the cost increases.
I work with many clients that are trying to save only $50 to $100 a month in an investment. I make almost nothing on these accounts and do it as a service. If you change the rules against these, I would be unable to do them as a loss and many of my clients would lose out on this service. (Some of these clients I make less than $18 a year on their accounts so any time spent with them already costs me more than I am reimbursed, but they are still receiving investment advice to make sure that what they have meets their needs and is suitable to their situation. Something that they will not get trying to purchase by themselves in an online experience with no specific person trying to help make sure it fits with their hopes, dreams and reality).
In 12 years of doing this for people I have not had one formal complaint about any of the investments that I have provided under the broker dealer suitability standard. How is moving the compliance level of my office going to provide a better experience when it costs more, takes more of my time, allows me to help fewer people, and provides no discernable benefit to the majority of people I help. I already am audited by my employer at least once a year when every client file is made available to them. I am contacted multiple times about making sure that the investments make sense and are suitable before accounts are opened and funds invested. I have been told by one compliance officer that I am considered a good compliance employee, yet I am still so heavily monitered that I have to fax weekly reports of every check and transaction, or correspondence that goes through my office. I cannot see any way that increasing that will help my clients.
In conclusion it is fun to theorize about the ideal world, but we have to live in the real one. Forcing a situation where the public that we are both trying to help has to pay more for an almost undiscernable benefit that costs them more to receive (one client of mine paid someone $1,000 to analize an investment of $4,000. They will never make up the difference of the 25% loss they recovered even if they go from the worst to the best funds in the same category. How were they helped?) The problems were are having now financially were not caused by the suitability standards. You do not kill a milk cow that will provide mild for years. Destroying the ability of up to 80% of the public to get good investment advice from a model that still works will harm are society for generations.