Morgan Stanley Smith Barney advisors have moved more of their business into advisory accounts over the past six months in advance of SEC rulemaking on the fiduciary standard, said Charlie Johnston during a panel on investor protection today at a SIFMA conference in New York. Johnston didn’t offer numbers, however, and said he didn’t know how much of the shift to attribute to anticipation of future rulemaking.
If they are making the switch due to future regulatory decisions, it is not necessarily a good thing, he and other executives on the panel suggested. The idea is that there is so much uncertainty around how straight brokerage accounts would be managed under the fiduciary standard that some advisors are opting to take the simple way out, said John Taft, CEO of RBC Wealth Management, another panel member. Advisory accounts are the “safe harbor” option, said Taft.
And if fewer advisors are willing to offer brokerage accounts, it could limit investor choice, especially for smaller investors, the panelists said. Advisory accounts are 50 to 100 percent more expensive than brokerage accounts, said Taft, citing an unnamed research report. Kathleen Murphy, president of personal investing at Fidelity Investments, said she had heard similar numbers cited in a separate, also unnamed, research report. (I’m working on getting those reports and will post more here when I do.) The only study I have heard of until now that reported that advisory accounts are bad for small investors (those with less than $250,000 in assets) was very controversial.
As is well known by most people in the wealth management industry by now, under Dodd-Frank, the SEC is authorized to implement a new rule that would create a uniform fiduciary standard for all financial advisory accounts, including brokerage accounts. Though the regulator is not required to write such a rule, in January, it released a study that recommended a strict fiduciary standard for broker/dealers. The SEC expects to begin rule making in the second half of the year, probably in the fourth quarter, said Taft. But finalizing those rules should take some time to complete, he added.
The uncertainty that worries the executives at the panel surrounds how a uniform fiduciary standard would work for certain classic brokerage activities like principal trading, new issue business, proprietary products and concentrated positions. The panel members said the SEC will need to offer specific rules to address how the standard will be applied to these activities.
One possible rule in this arena that has been discussed is requiring point of sale disclosures every time a firm does a principal trade for a client, together with approval in writing from the client. “That is not feasible in the world I live in,” said Johnston.
And yet, all in, the panel executives, who also included Ben Plotkin, executive vice president of Stifel Nicolaus, were very positive on the fiduciary standard in general. “What applying a uniform standard ought to do is raise the bar,” said Taft. “The fiduciary standard is consistent with best practices for our industry,” he added. Johnston also said that he felt confident the SEC is "sensitive" to the cost and client choice issues that the brokerage industry has raised. "I think they get it," he said.
Firms haven’t been able to do much to prepare for a new fiduciary standard rule because so much is still up in the air, said Taft, and most of RBC’s advisors haven’t focused on the change yet. But RBC is doing what it can, for example, letting its advisors know this is coming down the pike and doing some “scenario playing,” trying out different responses to potential outcomes. Taft said he wants to be sure that the transition for clients is seamless.
Johnston said he expects SEC rulemaking on the fiduciary standard to result in new consent or additional consent forms, new disclosures or add-ons, a need to educate clients and advisors about how accounts will work under the new rules, and “lots of new technology.” Once the rule is written it will take some time to implement, he said. “This can’t be something where a rule is written on January 1st and we are expected to implement it 30 days later,” he said.