Posted by Byron Bowman on February 27, 2013
During her testimony before the Senate Banking Committee on February 14, SEC Chairman Elisse Walter discussed the next step in the long road toward a uniform standard for investment advisers and broker-dealers. In response to spirited questioning by Sen. Jon Tester (D-Mont.), Chairman Walter predicted that the SEC will issue a formal request for information regarding the costs and benefits of a rule imposing a uniform standard of conduct. The SEC hopes to receive comments not only from investment advisers, broker-dealers, and the other “usual suspects,” but also from investors—both retail and institutional. Chairman Walter anticipates that the request for information will be issued “in the next month or two.”
Although the brokerage industry—through SIFMA, its trade association—has repeatedly stated that it is not seeking to water down a uniform fiduciary standard, there are many who worry that the SEC’s request for information will focus on the effects that a uniform fiduciary standard might have on the costs and availability of advisory services to investors. In particular, many expect broker-dealers to argue that a true fiduciary standard would require financial advisors to increase their fees and reduce their product offerings, and in the process close the door on many small investors seeking basic investment advice. Investors—particularly retail investors—are virtually incapable of posing an argument against such speculation since they do not have access to the profit-and-loss projections developed and relied upon by the brokerage and advisory firms.
However, such projections may not be the only source of wisdom on the cost-benefit front. As some of you may recall, fi360 was co-sponsor of a research paper that was published last year focusing on the impact of a fiduciary standard impose on broker-dealers by state laws, rather than federal regulators. (Michael Finke and Thomas Landgon, “The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice,” March 9, 2012.) Four states (California, Missouri, South Dakota, and South Carolina) impose “an unambiguous fiduciary standard on broker-dealers.” Professors Finke and Langdon surveyed broker-dealers located in these states and compared the answers to information available from broker-dealers in states where no fiduciary standard was imposed. Surprisingly, they concluded that the broker-dealer industry is not affected significantly by the imposition of a fiduciary standard; the availability of financial advice in the “fiduciary states” was not significantly different from the availability in “non-fiduciary states.” However, the opposition of the brokerage industry to the fiduciary standard may have stemmed from agency costs that the broker-dealers capture in non-fiduciary states; if this is true, then a fiduciary standard may result in a benefit to investors who cannot reduce those agency costs through their own individual efforts.
The problem, then, is to translate the Finke-Langdon study into comments that the SEC will consider as part of its request for information. While the SEC will take comments of industry participants such as large advisory firms and broker-dealers into account, it also listens to comments submitted by small industry participants and by investors. Commenters can encourage the SEC to follow-up on the Finke-Langdon study by inquiring into the comparative services and products available to investors in fiduciary and non-fiduciary states. Individual investors should be encouraged to explain explain that they are not always capable of understanding the cost structure of non-fiduciary advisors—or, more importantly, bargaining with those non-fiduciaries to reduce the costs of agency that flow to the advisors under a suitability standard—and that they feel much more protected under a fiduciary standard.
The next step in this process will be critical, because it will form the basis upon which the SEC is likely to make its final decision. Supporters of the fiduciary standard should not be reluctant to speak out and comment on these issues.