Yahoo Finance New York City Comptroller Wants to Make Fiduciary Status Clear
You may have expected New York City Comptroller Scott Stringer, in a "politics as usual" scenario, to closely ally himself with Wall Street interests. Wall Street can be a significant source of campaign contributions. But if financial industry heavyweights expected Stringer to "go along to get along," they must be terribly disappointed.
In March, Stringer's office issued a blistering report, entitled, "Safeguarding Our Savings: Protecting New Yorkers through the Fiduciary Standard." Although much has been written about the difference between a fiduciary obligation, which legally requires an advisor to place a client's interest above their own, and the lower "suitability" standard of brokers and insurance companies, this report goes for the jugular.
Consider this pithy summary: "Simply put, a suitability standard allows, and indeed frequently requires, a broker to put his or his firm's interests ahead of the client's interests."
Relatively few investors understand that brokers, operating under the suitability standard, can recommend the purchase of high-cost, high-fee funds. In fact, many brokerage firms encourage or require the sale of such investment products because they generate higher commissions. All registered investment advisor, or RIA, firms, on the other hand, are held to the fiduciary standard.
The hapless recipients of these recommendations -- Main Street investors -- are often unaware of lower cost alternatives with higher expected returns. These investors are likely proceeding on the flawed assumption that their broker would not recommend a fund that was not in their best interest. They may be blissfully unaware of the financial conflict of interest between them and their broker. This conflict may motivate the broker to act in a manner consistent with their own economic self-interest.
This issue has generated much controversy since last month's directive by President Barack Obama to the U.S. Department of Labor, which endorsed a new rule requiring all retirement advisors to adhere to the fiduciary standard. The New York City Comptroller's report takes this recommendation one step further. Stringer encourages the Securities and Exchange Commission to work in concert with the DOL to apply the fiduciary standard "to all personalized investment advice tendered by so-called advisers."
Here's where Stringer gets both creative and pragmatic. He appears to be a political realist and understands what could be considered the dysfunctional nature of our Congress. Although he is an advocate for federal regulatory reform, he is unwilling to wait for Congress to do its job and pass legislation that would protect all Americans.
In the interim, he wants New York to pass a state law requiring all financial advisors, including brokers and financial planners, to state "in plain language" whether they are under the fiduciary standard.
In support of this recommendation, he cites research indicating that "deceptive advertising practices" and "industry obfuscation" have misled three-quarters of investors into believing all financial advisors are held to a fiduciary standard, and thus are acting in their best interest. The report observes how many brokers, banks and insurance companies label themselves as "advisors," which contributes to the confusion on the difference between those who adhere to the fiduciary standard and those who don't.
Stringer will seek to advance legislation to require broker-dealers, advisors and traders to make the following disclosure, prominently displayed in writing:
"I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you."
The client would have to acknowledge receipt of this plain-language disclosure. The acknowledgement would also have to be maintained by the "non-fiduciary investment adviser" together with any written client agreement. The report concludes that requiring this kind of disclosure in both advertising, and at frequent intervals during the advisory relationship, "can help reduce consumer confusion and improve the investment security of all New Yorkers."
You can expect vigorous opposition to this common-sense proposal from the securities industry. Its trade association, The Securities and Financial Markets Association, or SIFMA, is on record opposing regulation that would require retirement plan advisors to be fiduciaries. It maintains that existing regulation is "comprehensive and coordinated," and adequately protects investors. SIFMA's real beef is that the lack of transparent disclosure benefits its members, the firms on Wall Street, at the expense of their clients.
Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."
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