By Knut A. Rostad, April 4, 2019

Originally published on Advisor Perspectives

The brokerage and insurance industry are lobbying to prevent states, like Maryland, from adopting a fiduciary standard. Those efforts, however, have exposed a series of false claims that belie the immense benefits a fiduciary standard brings to consumers.

The scene of Wall Street’s securities and insurance lobbyists descending on Annapolis March 13 to beat back the fiduciary proposal was out of Hollywood. The occasion was a legislative hearing to decide the fate of the Financial Consumer Protection Act of 2019 (Senate Bill 786 and House Bill 1127), which would impose a fiduciary duty on all financial professionals in the state.

Some 20 “suits” used their allotted three minutes each to describe the horrors the fiduciary standard will impose on investors. Among others, it will “drive up compliance costs,” “restrict choice to consumers” and impose “added costs and risks.”

I alone spoke for the legislation to the Maryland House Economic Matters Committee, while other fiduciary advocates submitted written testimony.

I implored delegates to do two things. First, to meet “Gail from Maryland.” On the home page of the Institute’s website, we feature Gail in a short video. Gail lives near Annapolis. She is accomplished, educated and smart.

Gail is also scarred from abusive conduct of a broker (who, of course, is not a fiduciary). I commended her to the delegates. Gail found the courage to publically speak out. I asked delegates to watch the video, listen to Gail and keep her picture and story in mind as they proceed to decide on a fiduciary rule.

I then urged delegates to take a hard look at the SEC’s proposed Regulation Best Interest (Reg BI), which Wall Street lobbyists have embraced with an adolescent exuberance.

This is what they will find:

Reg BI has been widely criticized as very flawed at its core by virtually everyone and every group – except for broker-dealer and insurance firms. It has been roundly condemned by investment advisers, investor advocates, investors, state securities regulators and others.

Concerns over Reg BI are bipartisan among SEC commissioners. When the proposed regulation was introduced April 18, 2018, Republican Commissioner Peirce called it “Suitability plus;” Democrat Stein deemed it, “Reg status quo.”

The brokerage industry wrongly claims a fiduciary standard will curtail advice to smaller investors. This claim is laughable – except that it a cornerstone of industry opposition. When a broker dismisses a client with less assets because the broker cannot meet a fiduciary standard, this client has many choices. Those start with the thousands of RIA firms that have no or very low minimums. Work your way to the country’s largest RIA, Edelman Financial Engines, which has a $5,000 minimum.

The brokerage industry wrongly asserts a fiduciary standard means fewer choices. This is nonsense. The brokerage industry will never own up to the current poor choices of expensive products, which will be reduced under a fiduciary standard. Better choices for advice with lower cost products will increase. This was the experience of the DOL rule — before it was eliminated.

The brokerage industry wrongly asserts state standards are unnecessary. At the November 2, 2018 conference regarding New Jersey’s proposed fiduciary rule, SIFMA urged New Jersey to not to impose, “duplicative, different and / or conflicting conduct standards.” SIFMA revealed more than it intended when it urged New Jersey to let the SEC pass Reg BI, as “It is difficult to imagine what new requirements a state standard would include that would be additive to the substantive investor protections in Reg BI.”

Those industry objections are without merit. It’s almost 10 years since the Treasury department’s 2009 financial reform paper, and the industry started its campaign of misleading claims and obfuscation around the fiduciary standard. Their views haven’t improved with time. At their best these objections seen in Annapolis lack seriousness and substantiation. At their worst they insult the intelligence of investors, policymakers and regulators.

After 10 years of a very public debate over fiduciary duties, not a single independent expert (not paid by a brokerage or insurance industry interest) has come forward to support the brokerage and insurance industry’s position and explain why fiduciary scholars, experts and advocates are wrong and the industry’s views are right. Not one.

Maryland, Nevada and New Jersey and other states have an historic opportunity to make an extraordinary difference: to lead the nation towards a real fiduciary standard. Investors, like Gail from Maryland, can only hope they do.