John Taft very graciously agreed to participate Monday on a conference call organized by the Institute for the Fiduciary Standard for Fiduciary September, along with Jack Waymire of Paladin Registry, David Armstrong of Wealthmanagement.com and Michael Falk of Focus Consulting Group, to discuss "Restoring Investor Trust". He provides a true public service in putting more light on what exactly the Securities Industry Financial Markets Association (SIFMA) means by a uniform standard for brokers and advisers.
In the call, Taft makes an energetic appeal for what SIFMA calls the "uniform fiduciary standard," the crux of which effectively scuttles the Advisers Act of 1940 Act. While branded "fiduciary," make no mistake, read the label and note there is precious little, fiduciary in its ingredients. Instead, it is all about brokerage sales and better branded, the "SIFMA Standard."
Taft proudly reminds me, "I am the architect of that (SIFMA) statement." This includes an impassioned defense of principle trades and IPOs undertaken by brokers, but called "fiduciary" because of the stated belief that a customer's best interest can be served by brokers in such transactions. He concludes "finding a way to more broadly overlay a fiduciary standard on all investment advice that professionals provide to individual investors" is what matters.
Let's be clear what the SIFMA Standard is not. It is not tinkering at the edges of fiduciary practices to accommodate minor deviations for brokers who, sensitive to conflicts' harms, seek to neutralize or mitigate conflicts consistent with investors' best interests. (If this were the case, the discussion would be very different because there are numerous areas where such an approach, an approach of tinkering at the edges, could be productive. But this approach is not the approach in the SIFMA standard.)
The SIFMA Standard is a rejection of established principles. The essential premise of the Advisers Act, that sales and advice need to be separated in law and transparent to investors, is wrong. The corollary premise of the Advisers Act, that conflicts of interest are inherently harmful, is also wrong. The key point, there is no real difference between brokerage sales and fiduciary advice. All advisers and brokers sell, all are conflicted. There is no material difference between (a broker) pushing principle trades which carry high fees and expenses concealed in opacity or (an adviser, on a fee-only basis) recommending ETFs or index funds with far lower transparent fees and expenses.
Applying this principle to the professions and the business world mean this: we should expect the same standard of expertise, professional skill, integrity and objectivity from our car salesman as we do from our children's pediatrician.
What's missing from the SIFMA narrative are answers to numerous questions that matter to investors. For starters, on transparency of fees and expenses, is SIFMA ready to follow John Thiel at Merrill Lynch and call for complete transparency and accounting on all fees and expenses? Will SIFMA do so? If not, why not? (Or, does this require study?) On conflicts of interest, why is it that SIFMA seems so opposed to brokers avoiding conflicts? How can a broker (like my lawyer and doctor) who is "conflicted" give "advice" anyway? Why don't you just call your brokers "brokers"?
The SIFMA vision is wrong for investors, the markets and economy. Its vision rejects the very idea of restraining advisors in relationships of trust and confidence. Instead, it seeks to apply brokerage sales rules and then "find a way to more broadly overlay a fiduciary standard," or just call them "fiduciary."
What if the SIFMA Standard was enacted? Legal structures would move. Generations of legal precedent and principles embraced by the Supreme Court and jurists such as Benjamin Cardozo and Harland Fiske Stone, would be effectively replaced with the SIFMA standard. Properly understood, it would also directly affront capitalism, as Jack Bogle reminds us, Adam Smith, the god father of capitalism, espoused market self restraint.
Further, the SIFMA Standard would implicitly remove "advice" - as traditionally understood - from securities regulation. This transformation to 'one size fits all' would not be explicitly acknowledged, of course, but it would be implicitly clear, none-the-less. The accompanying explosion of required new "disclosure" and more voluminous claims from brokers, of "fiduciary" status, would be just the start. Even more widespread investor misconceptions and harms would certainly follow.
A key question in this picture: how do fiduciary advisers stake out and protect a true "advice zone" in a world of sales practices?
No difference between "sales" and advice?". Sales is an honorable and important trade when conducted with integrity. But its not "advice." The best car salesman in the world knows he sells cars and doesn't diagnose children's ailments. Yet, despite the exuberance (or maybe because of it), energizing the SIFMA standard, it is not clear what SIFMA sees -- beyond a conflicted principle trade wrapped in a fiduciary bow -- when it criticizes fiduciaries "stuck" to the Advisers Act. Time may tell.
Knut A. Rostad, MBA, AIF®, is the regulatory and compliance officer at Rembert Pendleton Jackson, a registered investment adviser in Falls Church, Virginia. Rostad co-founded and chaired the Committee for the Fiduciary Standard and is currently co-founder and president of the Institute for the Fiduciary Standard, a non profit formed in 2011 to advance the fiduciary standard through research, education and advocacy.