The “Fake Fiduciary” Pivot

Mary Jo White, who runs the SEC, has now thrown her weight behind a universal fiduciary standard for all brokers and advisors who serve the investing public. She joins the White House itself on this side of the issue. Anyone with any common sense agrees that all investors, regardless of financial status, deserve unconflicted advice based solely on what’s in their best interests.

Anyone, that is, except for the people who benefit from the status quo. Like traditional Wall Street brokerages, whose product and sales culture is rife with conflicts, anti-client biases and ethical blind spots. It’s not all their fault – these firms are a legacy holdover from the World War I era when they first began life as US bond salesmen to the general public.

At this point, it’s pretty obvious that the brokerage industry’s lobby, SIFMA, cannot stop what’s coming. The momentum for a fiduciary standard has become overwhelming and the public gets smarter about the issue with every passing article and blog post.

But that doesn’t mean they’ll roll over and watch their immense profitability get washed out to sea.

The very clever thing they’re doing now is playing word games, talking about how they “support a fiduciary standard that is compatible with our business model.” Which of course, means no fiduciary standard at all, just a watered down version that hews more closely to the current “suitability” standard of care. The brokers are not out to get anyone, it’s just that this is how things have always been done and radical change is difficult. Especially when there are interests (read: shareholders) that are set in direct opposition to a more holistic version of advice.

I’ve been writing about this issue for seven years now and I always knew that this moment would come. I have dozens of friends who are wirehouse advisors and almost every one of them is ready to go full-on fiduciary if it comes down to it. They know it’ll mean a few years of down-revenue and realignment but they’re f*cking sick of the issue and want to compete with RIAs toe-to-toe. They’re highly competent, capable people with great client relationships – they can definitely make the transition and rebound stronger than ever.

And the truth is, good wirehouse advisors have been gradually shifting their books of business in this direction for fifteen years now, sometimes of their own volition and sometimes because it’s what the clients have asked for (some stats here). Fee-based accounts are not a new thing to the big brokerages. But they’re hardly the most profitable lines of business either.

Regardless, your typical wirehouse advisor team would be just fine in the wake of an overhaul of this sort. It would just take some time.

But the bosses…

The bosses can’t make the transition. Profits would sink and whole lines of business would be extinguished. It would be a genocide for middle managers, internal product people and an entire revenue layer’s worth of bureaucrats. CEOs and wealth management heads would have to convince investors that this will be worth the immediate revenue and earnings drop-off in the long run. Does anyone think long-term anymore? Would UBS or BofA be given the benefit of the doubt?

AdvisorHUB relays some comments from a wirehouse advisor about how hard the big firms are fighting this inevitability.

“So there you have it. When the bosses say they want a Fiduciary Standard, they mean they want a way watered down standard that allows all the old nasty sales culture items like proprietary product, grid based comp plans, high cost investment solutions and most of all the ability to win at the arbitration table doing everything as usual. But the secret is out. We live in the information age and the ability to spin this so it sounds good and keeps the status quo is shrinking away for the wire house bosses. After all these same people at the helm of the suitability shops have shrunk their market share from near 100% to just a third in the last four decades.”

So that’s the pivot: We’re all for fiduciary standards, but just don’t make us remove things like selling concessions, gross production targets and other incentives we use to drive commission growth.

The question becomes one of more than semantics: Does the industry get its way and oversee the rewriting of the term “Fiduciary” so that it preserves the old sales culture? Or does one big firm capitulate, the way I hope Wells Fargo Advisors might?

Pull up a chair, it’s about to get interesting.


Morgan Stanley’s ‘Jerry Maguire’ : “Fiduciary Standard Lies” (AdvisorHUB)

Read Also:

SEC Head Backs Fiduciary Standards for Brokers, Advisers (Wall Street Journal)

Adviser Duties: While Regulators Fiddle, Don’t Get Burned (MoneyBeat)

Will Wells Fargo Step Up and Lead (The Reformed Broker)

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