So the results are in: The Securities and Exchange Commission announced last week, after six months of study, that brokers should be held to the same fiduciary standard as advisers because investors assume their brokers are acting in their best interests anyway.
Response from the brokerage community has been as predictable as the SEC report's findings-it's hard to argue against putting investors' interests first, after all, but broker-dealers don't want a rule that will hurt their bottom lines.
Scott Smith, an associate director at Cerulli Associates, said the report's findings, while they don't set any kind of deadline for a blanket fiduciary standard, at least are "moving the ball in the right direction." And while the SEC's two Republican-nominated commissioners, Kathleen Casey and Troy Paredes, objected to the study's rigor, Smith doubts that there's any political merit in actively blocking a fiduciary standard.
As to the effect such a standard will have on the brokerage industry, Smith said that lawmakers specifically have not suggested outlawing commission-based sales since investors who would rather pay a single commission upfront rather than pay an ongoing fee should have that option. However, a new fiduciary standard would simply require advisers and brokers alike to be able to show that any recommendation they made is defensible and that the paperwork is in place to ensure investors understand exactly the service they're expecting from them.
As for potential timelines, Sophie Schmitt, a senior analyst at Aite Group, says the U.K.'s Financial Services Authority took two or three years to introduce a fiduciary standard for advisers that disallowed commission business. She doubts anyone will threaten commission-based business in the U.S.-forces in the financial services industry are too powerful to make it a winnable fight-but she expects that by the end of the year the SEC will at least have a framework for defining what constitutes a "fiduciary" and what could be expected of advisers.
Schmitt says continuity of care won't necessarily be part of new fiduciary standards, which could water down existing requirements for registered investment advisors (RIAs), who are currently policed by the SEC. A new standard could, however, help speed the trend toward fee business. As that happens, advisers who aren't able to make a living off fee-based business would leave the industry voluntarily, she said, organically creating the type of environment reformers are clamoring for.
Merrill Lynch, the firm behind the famous 2005 exemption from the fiduciary standard for broker-dealers, didn't return calls for comment at press time.
Quote of the Week
"Traditional mutual fund providers are fighting both tooth and nail for a shrinking piece of real estate, while established ETF providers face a different challenge: fending off a rush of new providers in a rapidly expanding marketplace."
- John Meunier
Principal, Cogent Research
