In my last post I suggested that we can soon say goodbye to the fiduciary standard for investment advisors, and I blamed several Evil Acronyms: FINRA, FSI, NAIFA and SIFMA. Here’s why.

FINRA. The Financial Industry Regulatory Authority, formerly the NASD, is the self-regulatory body that oversees broker/dealers and exchanges. It’s a private, not-for-profit  corporation that reports up to the SEC and supports itself via member dues – like a union. Perhaps it seems odd that RIAs, who are fiduciaries and cause hardly any problems, are regulated directly by the feared SEC, while brokers, who cause huge problems, are regulated by… themselves. This is because there are fewer than 40,000 RIAs, while there are well over 600,000 brokers, so guess who has Congress’s ear? FINRA likes to brag about how tough it is, as in this from its web site: “In 2013, through our aggressive vigilance, we brought 1,535 disciplinary actions against registered brokers and firms. We levied more than $65 million in fines.” But the true brilliance of FINRA lies elsewhere. The problems that cause all the trouble in the financial advisory business, the practices that cost investors billions and billions of dollars every year, are these: the commission system, the sale of loaded investment products, and kickbacks to brokers from mutual fund and annuity vendors. In other words, conflicts of interest. But FINRA is cool with all this! It’s only if a broker does something worse that he can get in trouble!

The other acronyms are all lobbyists:

FSI. The brokerage world is divided between brokers who hang their licenses off the big wirehouses (see below) and brokers who hang their licenses off independent B/Ds like LPL, Ameriprise, Hightower, etc. The Financial Services Institute represents the interests of the “independents” and, bless its little heart, is opposed to almost any regulation. It is feverishly opposed to the (gasp!) application of the fiduciary standard to brokers, but it’s also vocal about the crucial importance of commissions and 12b-1 fees.

NAIFA. The National Association of Insurance and Financial Advisors (originally the National Association of Life Underwriters) represents mainly smaller brokers and insurance agents, especially those specializing in selling insurance and annuities. NAIFA positively quivers with outrage over the idea that insurance agents – insurance agents! – should be subject to a fiduciary standard.

SIFMA. The Securities Industry and Financial Management Association is the 800-pound-skunk in the room. It represents the interests of the big wirehouses: Merrill, Smith Barney, Paine Webber, Dean Witter (all now owned by banks). SIFMA loves commissions and is determined to protect the right of you, the lay investor, to keep paying them. At the moment SIFMA has its guns trained directly on the possible application of the fiduciary standard to wirehouse brokers, and those guns are Major Howitzers.

The clout of the brokerage community is so great(1) that in 2013 it got the House of Representatives to enact the hilariously mislabeled Retail Investor Protection Act (known as “Ripoff”), the sole purpose of which was to prohibit the Department of Labor from applying the fiduciary standard to brokers who advise IRA account owners.(2)

What are the brokers’ arguments against extending the fiduciary standard to themselves? You’ll think I’m joking when I tell you, but here are the two most compelling:

#1. “We are big and powerful and if anybody in Congress or the SEC even thinks about extending the fiduciary standard to us we’ll be really pissed off and you’ll all be looking for new jobs soon.”

You really have to admire the sheer audacity of that position. But in case anyone (say, for political cover) wants a more reasoned argument, here it is, straight from the brokers’ mouths:

#2. “If we can’t keep ripping off Main Street investors then we won’t offer advice to them at all, so take that!?”

Depressing as all this is, the situation’s not totally hopeless, because there’s a hero out there. Actually, a heroine, a lady named Phyllis Borzi. Ms. Borzi happens to be the Assistant Secretary of Labor who runs the Employee Benefits Security Administration. It was her idea (i.e., that people who want to advise IRA accounts should be fiduciaries) that the House of Representatives scandalously targeted in the aforementioned “Ripoff” act.

The poobahs at DOL, under fire from FINRA, FSI, NAIFA, SIFMA et al., first withdrew Borzi’s fiduciary rule, and have since then kept delaying its re-release, now scheduled for August 2014. Undaunted, Ms. Borzi is sticking to her guns, apparently unaware that she is supposed to be trembling with fear.(3) One can only hope that that other lady over at the SEC is paying attention.


(1) SIFMA alone is among the largest 25 PACs in the US.

(2) The brokers would have gotten the Senate to enact the law, too, except that President Obama announced he would veto it, so the Senate didn’t bother. Technically, the IPA would have required the DOL to wait and coordinate its fiduciary rulemaking with that of the SEC. This was because, naturally, the brokers believe they have the SEC in their pockets.

(3) Full disclosure: I’ve never met Ms. Borzi, never even laid eyes on her. I do, however, want to marry her. (Not to worry, my wife doesn’t read my posts.)

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.

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