What Obama's "Brokers As Fiduciaries" Change Really Means


In Obama‘s new regulatory reform proposal, there is language concerning how brokers are looked at and treated versus investment advisors.

From the Wall Street Journal:
Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.

But requiring brokers to operate under a fiduciary standard could force them to offer products that are less costly and more tax-efficient. They will have to disclose any potential conflicts of interest, such as any fees they may get for favoring one product over another. That could mean clients will be offered fewer proprietary products if the broker can find a lower-cost option elsewhere.

It’s nice to see so many bloggers and reporters weighing in on this article…if only any of them had a clue about what they were saying.

As both an advisor and a broker, I’ll sum up the true impact that this will have on those who inhabit my industry in a few basic points…

Pointless Wirehouse Gets More Pointless

If you work as a broker/ advisor at a wirehouse firm (like Merrill, Morgan), you now have even less reason to be there.  One of the things Wall Street bulge bracket and wirehouse brokerage firms have always been good at is creating proprietary products out of thin air.  That’s great, but you still need a sales force to push that stuff and if the brokers themselves aren’t going to get an incentive for pushing firm product, you can pretty much say goodbye to these lines of business in their entirety.  90% of the products they create are worthless, dangerous, malfunctioning or some combination of the three, anyway.  This is a win for clients and honest advisors.

Legal Nightmare

Be ready for lawsuit overload if this goes through without any caveats or modifications.  Check out this line of thinking we’re going to open up the door to:  “My advisor made a recommendation in the market, the market went down, as my FIDUCIARY he should have known that the market could or would go down, I want all my principle back, see you in court.”  Yay for the lawyers!  Keep ’em coming.  This is a major loss for everyone except the shuysters/ ambulance chasers and their children’s college funds.

One Regulator To Rule Them All

This proposed rule change opens the door for one regulator covering both Broker/Dealers and Investment Advisors.  FINRA‘s justification for how they missed the Madoff scandal was that the brokerage side of Bernard L Madoff Securities was completely legitimate and that was what they were charged with auditing and monitoring.  The Investment Advisory side, they say, is where the massive fraud took place, and they were not the regulator of record for the IA business, the SEC was.  Madoff Advisory’s whole raison d’etré was the commissions that filtered through to the brokerage side, he took zero fees for advising.  If that’s the case then the two businesses should’ve been looked at as one entity.

Don’t be shocked to see the SEC take over FINRA’s duties completely as more broker/dealers become dually registered as investment advisors.  The seeds were planted with ex-FINRA chief and now current SEC boss Mary Shapiro‘s recent speech stating that if both businesses are doing the same thing with clients, they should both be regulated together.  This is a win for Mary Shapiro, too early to tell whether or not this is good for the industry or markets.

Say Goodbye To The Factory

For most independent brokers, who do not work at firms that make their money creating and pushing proprietary toxic waste products, this change will have very little impact.  We don’t get paid extra in independentland for offering one fund or product over another to please our corporate overlords.  We live and die by our ability to keep and satisfy customers because new ones aren’t calling us after our non-existent Super Bowl commercial doesn’t run.  This is a clear win for everyone except John Mack, whose combined Morgan Stanley Smith Barney Frankenstein sales force, 18,500 advisors strong, may be forced to think for themselves and manage for performance, not just for asset-gathering bragging rights…expect attrition.

Too Passive?

Is there a such thing as an advisor being too passive?  Is there a value to having an account with a low wrap fee with a broker who’s literally scared to death to call you with any ideas lest he put himself in legal jeopardy?  And how about the blatant apathy and negligence that could come of having a scenario where brokers take the fee as advisors and have very little incentive to to even look at the accounts of their smaller clients?  Guess we’ll all find out the hard way. Too early to tell if this will become a real problem, but if so, everyone loses.


In my mind, this is the rule that, if passed, will have plenty of unintended consequences but will ultimately level the playing field between the top 6 brokerages and everyone else.  I blogged at length about the regulatory unfairness in favor of the wirehouses yesterday (see Too Big To Fail).  Let’s see how the wirehouses cope when they can’t push their own proprietary stuff through their captive brokerage sales forces anymore.

And to those who’ve used that collapsing bull image or run posts under the heading “The Death of Wall Street“, go read a history book.  Anytime and anywhere people have money, they will always need advice as to what they should do with it.  This proposal may mean the end of the bulge brakcet’s retail dominance, but for many of us, we’ll look at it as a new beginning.


Big Change for Brokers (WSJ)

Props to Wordle for the word cloud creation tool

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