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.

A broker who generates $1 million in dealer concessions receives $800,000 on the low end and $3.5 million on the high end-money no honest RIA firm would be capable of scraping together. Our tax dollars are subsidizing a sales and asset-gathering culture, giving firms that have fought being held to a real fiduciary standard a powerful recruiting advantage over fee-compensated firms that put the consumer's interests first.

It gets worse. Advisors all across the country are starting to hear from their clients and prospects a sly, powerful new sales pitch, which apparently was hatched at brokerage firm home offices and whispered to their brokers in the field. The brokers are telling financial consumers that it is "too risky" to work with independent RIA firms. "If our firm gets into financial hot water," they are telling customers, "the government will bail us out and protect your assets. If those independent financial planning firms go under, they're gone, and you wouldn't have any protection."

So when the wirehouse firms complain that they're getting a raw deal from the regulators and Congress, that it cramps their style to live up to a fiduciary standard of care, that it's unfair to have to tell customers about commission-laden financial products in plain English, that it's impossible to live under conservative accounting standards that prevent 50 to 1 leverage and off-balance-sheet adventures in derivatives-well, there are worthier candidates for your sympathy.

The millions of TARP dollars that will be spent lobbying against this proposal are not being spent to seek any favors for the consumer. The new regulatory proposals are a rare piece of good news for advisors, who have seen TARP money and implicit guarantees tilt the planet so that everything they do seems like an uphill climb.

Even so, I think there are a lot of risks in the implementation. The SEC still appears committed to putting the fiduciary label on brokers and RIAs, and then shipping them off to FINRA, where they would be held to a suitability standard—emasculating that pesky fiduciary distinction that gives the brokerage community so much heartburn. After that, one can expect the wirehouses' favorite regulator to dramatically raise the compliance costs of all those little, low-margin independent firms.

BUSINESS AS USUAL?

Meanwhile, despite a clear mandate from the Obama administration, the SEC is already relaxing its oversight on Wall Street. At a recent conference of brokers employed by Wall Street firms, I found myself sitting with several marketing employees of a well-known fund company. I told them that I was surprised to see them there, since five years ago the SEC had responded to a series of scandals by prohibiting brokerage firms from taking under-the-table payments for shelf space. I asked: Are you still making shelf-space payments?

One of the marketing executives winked at me. "Sure we are," he said. "Only now we call it 'revenue sharing'." I talked with several other exhibitors. Virtually all of them are making the same shelf-space payments they always did. One told me that his firm characterizes these payments as "educational expenses" for the brokers. I asked: Education on what? The marketing rep replied, "Educating them on how to sell our products."

Can the fiduciary model survive all this? I think it can. The regulatory reform proposals are an unexpected breath of fresh air in the debate over financial services regulation. They have created a battle between advisors who put clients' interests first and Wall Street firms that fight consumer protection because it would reduce their profits so much that they wouldn't be able to pay themselves and their reps those seven- and eight-figure bonuses. For the first time, I think the good guys have a fair shot at winning.

Bob Veres publishes the Success Factors white paper, which contains the best practice management ideas from his Inside Information service over the last 10 years. For more, visit www.bobveres.com.