In a compliance session at the recent NAPFA National Conference in Washington, Steve Blum, a business ethics professor at the Wharton School, talked about the difference between strict fiduciary standards, where the advisor works purely for the benefit of the client, and suitability standards, where the employee of the brokerage firm works on behalf of the company.

Then Blum challenged SEC Chairperson Mary Schapiro's oft-repeated refrain that consumers are confused about the distinction between brokers and financial advisors, and that therefore we need to regulate them under the same umbrella. "There is no confusion in the public's mind that they are entitled to a duty of loyalty from their financial advisor," he said. "What they are confused about is who provides this and who doesn't."

A BETTER APPROACH

While Schapiro and lobbyists for the securities industry have been trying to tilt the financial planet in favor of the brokerage industry, officials in the Treasury Department and Federal Reserve have apparently been working in a direction more in agreement with Blum's thinking. As I write this, the Obama administration's white paper entitled Financial Regulatory Reform: A New Foundation is making the rounds in Congress. Among its proposals is heightened regulatory supervision for large interconnected firms called Tier 1 Financial Holding Companies, and a real fiduciary standard that would be applied to brokers as well as RIAs.

Like Schapiro, the white paper calls for the SEC to "harmonize the regulation of broker-dealers and investment advisors." But instead of pushing all regulation downward toward compliance and suitability, it points out the very things Blum talked about: that "retail investors rely on a trusted relationship that is often not matched by the legal responsibility of the securities broker." It goes on to say that the SEC should "examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors' best interest."

Finally, the white paper proposes to create a new Consumer Financial Protection Agency with a role similar to that of the FDA: to weed out harmful financial products before they can get on the shelves. The authors of the report noticed that 47 pages of dense legalese is not an ideal way disclose conflicts or risk factors to consumers. The white paper recommends that the CFPA undertake "a new proactive approach to disclosure," which would be "clear and conspicuous in their identification of costs, penalties and risks." I can hardly wait to see how the insurance industry applies this standard to variable annuity prospectuses.

By the time you read this, you will have already heard howls of calculated outrage from the industry, and creative efforts by Schapiro to undermine this refutation of her broker-centric regulatory vision. Indeed, speaking only a day after the white paper came out, Schapiro showed how little she understood the fiduciary concept when she suggested that if a conflict of interest "can't be avoided," then it should be "disclosed." One can envision wirehouse firms arguing that they just simply can't avoid conflicts of interest, but they're still willing to call themselves fiduciaries for marketing purposes.

AN UNEVEN PLAYING FIELD

Despite all the gnashing of teeth, I would argue that the financial services playing field has, for many years, been tilted in favor of the brokerage firms. Wall Street giants have been allowed to operate with manifest, highly profitable and largely undisclosed conflicts of interest. They tell their brokers to recommend any toxic asset they want to sell out of their house investment account. They have brokers recommend their own in-house mutual funds, which carry heavy expense loads. These firms rake in profits from activities that an RIA is not allowed to engage in, and then use their lucre to buy prime-time advertising that depicts brokers as trustworthy advisors whose total focus is on the goals and financial success of their customers.

They use their conflict-of-interest profits to buy influence in Washington. This, in turn, gives them enormous leverage over the regulatory authorities. Writing about his service at the SEC, Arthur Levitt told how he tried to rein in excessive balance sheet leverage at brokerage firms and was told to back off by members of Congress.

USING THE GOVERNMENT

In recent months, the government tilted the playing field even further by not only rescuing these firms from bankruptcy, but also giving them ample cash to stuff into the shirt pockets of their brokers. Generous bundles of TARP money are being used to pay anywhere from 80% to 150% of their brokers' 2008 earnings as an upfront inducement to sign seven-year employment contracts—essentially a bribe not to cross the line and become fiduciary RIAs. They are paying anywhere from 150% to 350% to brokers who join them from other firms and sign those same contracts.