July 7, 2017
Dear SEC:
Our firm has been in good standing since its founding in 1982. We provide both fee-based advisory services on a fiduciary basis and securities brokerage, using a suitability convention. In practice we treat all customers the same, regardless of whether they are advisory or brokerage customers. We find the DOL fiduciary rule to be offensive and an extreme extra-constitutional overreach. We also believe that our government and specifically the Department of Labor have demonstrated a severe lack of understanding of the securities industry and of basic math.
For the record there are dishonest financial advisors and dishonest securities brokers. Both should be identified and forced out of the industry. The firms and the regulators need to work together to make that happen. But forcing a fiduciary requirement on retirement accounts will not prevent mistreatment of these customers and may in some cases encourage such mistreatment. It should be obvious to anyone who is paying attention that the large firms have shifted most of their operations to fee-based advisory with a fiduciary standard from securities brokerage with a suitability standard. They did not do this because it is better for the customer. They did it because it is more profitable and more consistently profitable. Financial advisors charging a fee receive a stream of payments in good markets and in bad, when they are giving advice and when not, when helping the customer and when hurting them. And for some mysterious reason, the fee they charge is somehow not considered in the calculation of their acting in a customer’s best interest(i.e. a fiduciary standard).
Let me do some basic math for you that the DOL seems not to understand. I have been licensed for 30 years. 30 years ago I invested customer money as a broker in mutual funds and earned a commission of 1% to 5%, depending on the size of the investment. Since that time I have received a 12b-1 fee of 0.25% per year for servicing the customer year in and year out. Assuming a $100,000 investment with no growth in value(for purposes of this discussion), over that 30 year period I would have received an initial commission of 1,000 to $5,000 and total 12b-1 fees of $7,500 for a total of $8,500 to $12,500. A fee-based advisor charging 1% to 1.5% for that same fund investment with no growth would have received 30 years of fees totaling $30,000 to $45,000. If we used a larger investment(which is much more common) and growth in the value of the investment(which is typical), the disparity between the brokerage commissions and the advisory fees would be even greater. Who really is acting in the best interests of the customer? The DOL rule will cause more investors to have to pay substantially more for the services they need. Count on it.
In most cases in my business, I tell customers that they should pay for advice(a brokerage arrangement with a suitability standard) and try their best to understand that advice with my help and through outside sources. They should not be paying someone(a fee-based financial advisor) every day indefinitely on advice that was often given long ago. Most of what we do is investment, not speculation. Thus, the only investment advice the customer needs most of the time is to stay patient, and the customer should not have to pay for that advice forever. For some clients a fee-based advisory relationship makes some sense, and we offer that to them. I know that I could put everyone in a fee-based advisory relationship and maximize my own return on them as an advisor, but that would be unethical. But for some reason my government is now complicit in forcing such relationships.
The DOL seems to have a problem with the conflict of interest a salesperson has in earning a commission for giving investment advice. But fee-based advisors(fiduciary standard) have their own conflicts. A fee-based advisor will naturally push customers into a more costly fee-based arrangement(often not in a customer’s best interest). A fee-based advisor will typically do whatever is necessary to retain the fee-based relationship to keep the annuity stream of payments flowing to the advisor. Thus, the advisor may typically err on the side of overly conservative strategies, which may not be in the best interest of the customer. The advisor may give no advice and maintain the status quo when decisive action would be in the best interest of the customer. The advisor may keep a customer fully invested to earn a fee on invested balances when a cash holding of some size would be in the best interest of the customer. And, of course, advisors are just as human as brokers, and they are just as capable of making dumb or poorly considered decisions not in the best interests of customers. Having a fiduciary standard does not ensure that an advisor can make decisions in the best interest of a customer.
The suitability standard required of brokers is heavily regulated and litigated. Rogue brokers do not get very far for very long. The suitability standard is highly effective in ensuring that customers obtain advice that is appropriate for them in their current situation. No industry on this planet is more regulated than the securities brokerage industry. Our government should understand that and should stay out of things it does not understand. We ask that you do what you can to stop this silly, foolhardy, and dangerous regulation before it harms the most vulnerable customers in our industry.
Dan Pisenti
Whitehall-Parker Securities, Inc.
477 Pacific Avenue, 2nd Floor
San Francisco, CA 94133