Those in the know in the financial field know who Ron Rhoades is. They also know that when he speaks, people generally listen. So it's not surprising that his blunt comments in a recent article (see "Wall Street's Whipping Boy and a World Without a Fiduciary Standard," FiduciaryNews.com, January 14, 2014) reverberated throughout the rather narrow walls of financial services community.
What makes the comments even more interesting is that within days of their receipt, the SEC issued its examination priorities. Due to publication time tables, it appears the SEC statement came out before Rhoades' comments, but, trust me, as the one conducting the interview, I'm intimately familiar with the actual time table. I received Rhoades' email well in advance of the SEC announcement.
Here's the quick recap: The SEC, surrounded by a bipartisan army well-greased by industry lobbyists, is trying its best to avoid proposing a uniform fiduciary standard. Why? Because the only politically palatable one requires such a watering down of the current fiduciary standard that it may not pass the Dodd-Frank "no less stringent" test. This leaves the SEC talking a good game but, in the end, merely going through the motions.
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But the SEC knows better. It recognizes it has a problem with conflicts-of-interest. It may even recognize, as suggested by peer-reviewed studies, that disclosure will not eliminate or even reduce the problem. In fact, it may make the problem worse. It seems like the SEC is stuck between a rock and a hard place.
On the other hand, maybe it's not.
The SEC knows it has cards it hasn't played, and the biggest one is its examination process. The process itself gives examiners much leeway. Over the years, that leeway has generated a lot of horror stories within the adviser community. That's how significant this leeway is.
So when the SEC says it has specific examination priorities in 2014 and that those priorities will focus on conflicts-of-interest coming from dual registration, the use of wrap fees and IRA rollover advice, it's pretty clear the Commission have the brokerage industry in its sites. Examiners will no doubt be seeking any shred of evidence there might be a conflict-of-interest. And, given the aforementioned leeway, it can conduct both a wide sweep as well as a deep search. And, as with most of its leeway, ties go to the SEC.
The beauty of this strategy, of course, is that it can allow the SEC to effectively enforce existing rules, and by emphasizing rules consistent with the existing fiduciary standard, effectively make that fiduciary standard universal. To me, this sounds like making an end run around the need to create a new universal fiduciary standard.
This might actually work. Once the SEC begins to build a record of cases and precedents, the need for a formal standard would appear to diminish.
Couple to this Rhoades' other point and we may see the already psychologically beaten brokerage industry throw in the towel (by either giving up their dual registration or by simply switching sides – giving up their brokerage license for formal registration as an Investment Adviser – there's that nasty "er" ending again!).
This is not to say the brokerage industry will die or fade away. It will merely go back to the time when it focused on commissions. Investors will still have the opportunity to make trades with brokers, only now the confusion caused by overlapping titles and dual registration will be gone. Brokers could then comfortably lie in their liar of suitability, resting assured they will not get hectored by fiduciary advocates, for they will clearly not be engaging in fiduciary duties.
And brokers that do edge closer to the line of the bona fide fiduciary will find the SEC waiting at the gate, ready and willing to hold the broker accountable for any conflicts-of-interest.
Only when this becomes reality can we truly say the industry – overall – is acting in the clients' best interests.
And we don't need a uniform fiduciary standard to get there.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
