To understand the fundamental problem with the regulations surrounding personal financial advice, you need to look no further than this single sentence from the Securities Exchange Commission’s March 1 request for information on the obligations of broker dealers and investment advisers.
The problem, described in crystal clear terms, is that the SEC has lost sight of its purpose.
Regulations are supposed to protect the public not accommodate business models.
They go on to ask us to assume that disclosure is adequate to demonstrate the fiduciary duty of loyalty. This is sad. Telling someone what you will do before you wrong them does not make the action acceptable. Any kindergartner can tell you that.
Too often we see examples of how regulators presuppose that the public has some idea how the financial services world works. The public doesn’t know the difference between an advisory account and a brokerage account. “Disclosing” to clients that under certain circumstances, a firm may receive remuneration from affiliated parties or unaffiliated sub-advisors doesn’t tell them what is paid, who is paying it, when it is paid, or how the payment is ultimately drawn from the client’s funds. The public simply doesn’t know how unprotected they are.
The commission knows this. Several studies highlight investor confusion including ones commissioned by the SEC itself. Regulations that protect the public should not expect the public to know anything about financial regulations.
The big money forces that influence Congress to pressure the SEC to “accommodate different business models” offer nothing but excuses. In essence, they are saying if we cannot do things and charge amounts the public doesn’t see or understand, we won’t work with the public. The SEC should be replying, “Good!” rather than trying to be accommodating.
If financial services firms can’t meet the only sensible standard that should apply to delivering personal financial advice, they need to change their modus operandi, not work to change the standard.
There are plenty of advisors that will have no problem accepting the fiduciary duties of the Advisor’s Act. They already behave this way. Being required to do what you already do is not a burden. Being required to do something you aren’t doing can be.
I pray the SEC stands up and decides they need to address the problems facing the public, not the problems the financial services industry want to avoid. We’ll see. So far, I am not encouraged. Heck, the commission has gone so far away from its purpose it even allowed the National Association of Securities Dealers to change its name to the “Financial Industry Regulatory Authority.” Here, I was always under the impression that was the SEC’s job.
Dan Moisand is a Founding Member of the Institute’s Industry Council, and a principal at Moisand Fitzgerald Tamayo.
