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Thursday, March 4, 2010

Still Interested in Working With a Stockbroker ?

Seems that Congress has decided that (surprise) the simple issue of whether a stockbroker should be held to a fiduciary standard the same as registered investment advisors like me is just too complicated to resolve at this point. So as Chairman Dodd goes into retirement his policy idea of making this change also goes into hibernation. His successor from the same party instead proposes this beaut from the nyt article on the subject: (my bolds my comments in blue)

Senator Tim Johnson, a South Dakota Democrat on the Banking Committee, has proposed an 18-month study of the brokerage and investment advisory industries, an effort that would replace Senator Dodd’s provision.,,,,
The study proposal by Senator Johnson may be included in the actual bill, which means it would not be subject to debate. And consumer advocates contended that the study would stop regulators from making any incremental consumer-friendly changes until the study was completed. The study would also require the S.E.C. to go over territory already covered in a 228-page study, conducted by the RAND Corporation in 2008 at a cost of about $875,000, the advocates said.
“In my opinion, the Johnson study is a stalling tactic that will either substantially delay or totally prevent a strong fiduciary standard from being applied,” said Kristina Fausti, a former S.E.C. lawyer who specialized in broker-dealer regulation.
The S.E.C. has been studying issues related to investment-adviser and broker-dealer regulation and overall market conditions for over 10 years,” she said. “It’s puzzling to me why you would ask an agency to conduct a study when it is already an expert in the regulatory issues being discussed.”
Even after the study was completed, legislation would still need to be passed to give the S.E.C. authority to create a fiduciary standard for brokers who provide advice. “As we all know, the appetite for doing this in one or two years is certainly not going to be what it is today,” said Knut Rostad, chairman of the Committee for the Fiduciary Standard, a group of investment professionals advocating the standard. His group circulated an analysis that tried to illustrate where answers to the study’s questions could be found.

Far be it from me to suggest that someone staying in office would be more sympathetic to financial industry lobbyists and potential donors than someone retiring but.....the industry has been clearly fighting any change. And as an analyst of the industry notes in the same article:

Imposing a fiduciary requirement could have an impact on investment firms’ profits. Guy Moszkowski, a securities industry analyst at Bank of America Merrill Lynch, said that the impact of a fiduciary standard was hard to determine because it would depend on how tightly the rules were interpreted. But he said it could cost a firm like Morgan Stanley Smith Barney as much as $300 million, or about 6 to 7 percent of this year’s expected earnings, if the rules were tightly defined. “It’s very nebulous, but I think that is a reasonable estimate,” he added.
In a research report about Morgan Stanley last year, Mr. Moszkowski wrote, “Financial advisers will be expected to take into account not just whether a product or investment is suitable for the client, but whether it is priced favorably relative to available alternatives, even though this could compromise the revenue the financial adviser and company could realize.”

And judging from some folks who are working or have worked as stockbrokers it seems clear they are trained as salespeople to generate commissions and their behavior would likely not meet the test of fiduciary standards. Seems like that thundering herd (do they still call it that ?) and their colleagues have their eyes more on their commission statement than your brokerage statement:

Technically speaking, most brokers (including those who sell variable annuities or the 529 college savings plans) are now only required to steer their clients to “suitable” products — based on a customer’s financial situation, goals and stomach for risk. But Marcus Harris, a financial planner who left Smith Barney 10 months ago to join an independent firm in Hunt Valley, Md., said the current rules leave room for abuse. “Under suitability, advisers would willy-nilly buy and sell investments that were the flavor of the month and make some infinitesimal case that they were somehow appropriate without worrying,” he said.
Kristofer Harrison, who spent a couple of years at Smith Barney before leaving to work as an independent financial planner in Clarks Summit, Pa., said the fact that brokers were paid for investments — but not advice — also fostered the sales mentality.
“The difficulty I had in the brokerage industry” he said, “is that you don’t get paid for the delivery of financial advice absent the sale of a financial product. That is not to say the advice I rendered was not of professional quality, but in the end, I always had the sales pitch in the back of my mind.” 

Like me (in my case after an extremely short stint at a major firm that even calls itself financial advisors while in fact it is a sales organization) these gentleman have seen the light and left the dark side of the industry

Mr. Armstrong, Mr. Harris and Mr. Harrison all said they had decided to become independent because they felt constrained by their firms’ emphasis on profit-making and their inability to provide comprehensive advice.
A current branch manager of a major brokerage firm who did not want to be identified because he did not have his employer’s permission to speak to the media, confirmed that “you are rewarded for producing more fees and commissions.”While he said that “at the end of the day, I think that the clients’ interests are placed first and foremost by most advisers,” he added that “we are faced with ethical choices all day long.”

Do you really want to work with someone who each and everytime he recommends a move in your investments has a conflict between his interests and yours ? And unlike registered investment advisors like me, he has NO legal requirement to put your interests first,.

The article continues....

Unlike fiduciaries, brokers do not have to disclose how they are paid upfront or whether they are have incentives to push one investment over another. “The way the federal securities law regulates brokers, it does not require the delivery of information other than at the time of the transaction,” said Mercer E. Bullard, an associate professor at the University of Mississippi School of Law who serves on the Securities and Exchange Commission’s investment advisory committee.

 And for those hoping for more rules for mortgage brokers and lenders, credit card companies and others in the financial services.....don't bank on that one (pun intended) :

The legislative language on fiduciary responsibility was one part of the financial overhaul bill aimed at protecting consumers’ interests. Another part, setting up an independent consumer protection agency, may also be watered down.