July 30, 2010
Harmonizing the regulations between a broker and an advisor is a good idea. I would suggest that the rules based oversight provided by FINRA is superior to the priciples based oversight of advisors.
A fiduciary is thought to be a higher standard than suitability and legally it is. But practically,a rep or advisor that wants to maintain a mutually beneficial long term arrangement with a client will continue to make sure that the product that was suitable yesterday is still appropriate today and tomorrow.
The additional requirements of a fiduciary include disclosure of conflicts and processes. Making this transparent sounds like a good idea but in actuality, if the disclosure goes on for too many pages and is written poorly, my clients will probably not read it. If they don't read it, what good is the requirement to disclose? I believe there is an inverse relationship between the length of the disclosure and the understanding of the disclosure. If the regulations could create a summary disclosure piece that highlights the most important points on one page in sixth grade English, then we would be making progress.
The bottom line is that I provide required disclosure when I'm acting as a broker or adviser with my respective companies but most of my clients have never read the prospectus or ADV brochures. I tell them they should read them. I try to explain some of the key points in those documents but I can't possible be all inclusive unless I read the entire document. So in the end it come down to TRUST. If they trust me they elect to do business with me. Luckily I'm honest so I don't hurt them but most of the Ponzi schemes that have been reported on, involve advisors. So while a fiduciary may be a higher standard, in itself, it does not protect our clients. I doubt you can create regulations that prevent crooks from doing bad things so lets be careful in requiring only regulations that are meaningful to protect the consumer the way the consumer actually behaves.
I am also concerned about how harmonizing these rule will apply in ERISA cases. Plan paticipants want advice but the current rules make it difficult to give more than education which isn't what the participant wants or needs. Levelized compensation is helpful but the new rules that limit 12b(1) comp to 25 bps makes this concept unprofitable to the rep in small plans with few assets. The extra cost of oversight and disclosure makes it unlikely that my firm would allow me to do this with a price that is reasonable to the consumer. We need a solution that allows a rep or advisor to be fairly paid for their time, without unduly burdening the process with disclosure that isn't read while balancing the concerns of the participants so that they are fulfilled.
At the end of the day, a broker or advisor giving advice to a retail client or to participants in a ERISA plan should do it using the same rules if that is possible. The client wants advice I would suggest in closing that the FINRA rules and the Investor Act should be amended in such a way that FINRA provides the oversight rather than the SEC.
The SEC does not have enough people so we would be spending enormous amounts of money to provide the regulations. The SEC did not prevent the Ponzi schemes. The FIRA regs are very effective in causing the compliance department and my firm to be proactive with me.
Thanks you for the opportunity to present my views.