Financial Planning Coalition, Taking On Wall Street And The SEC, In A David Versus Goliath Battle On The Fiduciary Standard Hot

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FPC fittingly cites another David versus Goliath showdown over the fiduciary obligation: Financial Planning Association versus SEC.  That three-year battle was a major victory for FPA and independent advisors, ending with a 2007 court decision vacating the “Merrill-Lynch Rule” and forcing Wall Street’s biggest firms to adhere to a fiduciary obligation in serving clients that had been served previously as brokerage customers.  
FPC marshals important facts in this letter at a big moment in the fiduciary standard bettle. The FPC letter is a response to a March 1, 2013 request for information by the SEC concerning a potential uniform fiduciary standard of conduct for both broker-dealers and investment advisers when providing personalized investment advice to retail customers.  At the same time, however, the debate over the imposition of a single fiduciary standard has been going on for three years and is likely to come to a finish by early next year. This document makes a convincing moral argument that the FPC will be making as the fiduciary standard debate moves toward resolution, and it sets the stage for another David versus Goliath battle that pits the Financial Planning Coalition against Wall Street and, at times, against the SEC.
FPC says Wall Street firms have the data to show why a single fiduciary standard would be in the best interest of consumers, and urges the agency to ask Wall Street for the data. FPC says after the 2007 U.S. Court of Appeals decision in FPA versus SEC, Wall Street firms were forced to convert a one million client accounts with some $300 billion to RIA accounts from brokerage accounts. “Industry data indicates that the number of these accounts and the assets in the accounts, have grown dramatically since the conversion,” says FPC.
FPC repeatedly uses Wall Street’s own words to argue that the brokerage industry’s position on the fiduciary standard—that a stringent standard would cut off consumers from receiving financial advice—should not be relied upon.
FPC twice quotes Ira Hammerman, general counsel at Securities Industry and Financial Markets Association (SIFMA), who had warned in 2005 that it would be harmful to consumers to reverse the broker-dealer exemption during the debate over that rule. (SIFMA is the leading trade association for the financial industry that represents hundreds of securities firms, banks and asset managers.) Hammerman is quoted by FPC letter arguing that reversing the  Merrill-Lynch rule exempting brokers from the Investment Advisers Act rules when providing investment advice that was incidental to a transaction “would likely work to the disadvantage of customers, who, as a result, could face increased costs or who could lose their chosen forms of brokerage accounts to the extent their broker-dealer determined not to continue to provide those forms of accounts rather than effect such conversion [to advisory accounts].”
“During the pendency of the FPA’s suit against the fee-based brokerage rule,” FPC says, “the same broker-dealer industry representatives [Hammerman] argued that: ‘The forced closure of this brokerage pricing avenue would be a major loss of client choice and a significant diminution in both pricing and account management flexibility that clients have come to expect and enjoy.’”
FPC argues that “none of the parade of horribles presented by some members of the broker-dealer industry actually occurred.”
“Those firms were able to transition their fee-based brokerage accounts to advisory accounts subject to a fiduciary standard of care,” says FPC. “Since 2007, those accounts have continued to multiply and grow in size without growing in cost or decreasing in flexibility. The Commission should be similarly skeptical today of those who argue that a fiduciary standard of care would impose crushing costs or deprive customers of relevant choices.”
FPC also says that the SEC’s request for information is itself flawed and makes numerous incorrect assumptions about a fiduciary standard. It argues that the Dodd-Frank Act mandates creating a fiduciary standard that was at least as stringent as the current standard applied under the Investment Advisers Act. The current standard should not be adapted to the brokerage industry, says FPC. The industry should adapt to the standard under the ‘40 Act.
The FPC takes SEC to task for assuming in its request for information that financial planners, once they provide a financial plan to clients, are not subject to a continuing fiduciary duty.  FPC says CFP Board rules state that once planning advice is given to a client, a CFP will continue to owe that client a fiduciary duty.    
I highlighted important points in the letter in yellow. But the really important arguments don’t start until page 18 and can be found toward the end of the letter. Look for my red check marks noting those items. Here below is a summary of the letter stating FPC’s position along with the most important information from the document, along with key snippets from the document.
  • FPC believes that a uniform fiduciary standard should apply to all investment advice provided to retail customers, whether that advice is delivered by an investment adviser or a broker-dealer.
  • The standard must be “no less stringent” than the fiduciary standard that already applies to investment advisers and should incorporate and apply law and precedent developed under the Advisers Act.
  • The SEC need not, and should not, delay  a decision on the fiduciary standard until it has harmonized investment adviser and broker-dealer rules.
  • An Aité Group survey sponsored by FPC submitted and a separate study by two professors Finke and Langdon study show that a uniform fiduciary standard will not impose undue costs or burdens on customers or on financial services firms.
Key snippets:
  • The Aité Group surveyed 498 different financial advisers selected from a panel of financial advisers put together by ResearchNow. The findings of the study are explained in more detail below, but in summary, those financial advisers (both at broker-dealers and at investment advisory firms) who deliver services to their customers under a fiduciary standard found that they experience stronger asset growth, stronger revenue growth, and obtain a greater share of client assets than those that provide services primarily under a non-fiduciary model. The findings also show that the fiduciary financial advisers do not spend any more of their time on compliance or other back-office tasks. In short, transitioning to a fiduciary model is not likely to have a negative effect on broker-dealer financial advisers; quite to the contrary, it is likely to improve their relationships with their customers and the quality of advice to those customers.
  • Transitioning to a fiduciary model is not likely to have a negative effect on broker-dealer financial advisers; quite to the contrary, it is likely to improve their relationships with their customers and the quality of advice to those customers.
  • Of the financial advisers surveyed by the Aité Group, over two-thirds of the financial advisers associated with investment advisers, and more than half of the financial advisers associated with broker-dealers believe that a fiduciary standard is the appropriate standard of care for dealing with retail customers.
  • We urge the Commission to consider carefully the article by Professors Michael Finke and Thomas Langdon, The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice….The study finds that a fiduciary duty has no measurable effect at all on the availability of broker-dealer services to retail customers.


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