June 25, 2010 / 9:14 PM / 10 years ago

Analysis: Fiduciary debate moves from Congress to SEC

NEW YORK (Reuters) - After more than a decade of debate among lawmakers, the job of establishing a higher fiduciary standard for brokers soon will reside in the hands of the Securities and Exchange Commission.

While lawmakers moved one step closer to a common standard of customer care among financial advisers, advocates on both sides of the debate say the actual impact of the bill depends on what SEC commissioners do with this mandate.

“I’m not breaking out the champagne by any means,” said David Tittsworth, president of the Investment Adviser Association and an advocate for a common, higher standard. “Now the debate shifts from Capitol Hill to the SEC.”

A Congressional committee early Friday morning passed a compromise bill for financial regulatory reform, imposing a number of tough provisions on banks and brokers. The Dodd-Frank bill also provides that the SEC, following a six-month study, may draft new rules that require brokers always to act in an investor’s best interests.

If the bill wins approval, the SEC must conduct a six-month study on the impact of forcing broker-dealers at firms like Merrill Lynch and Morgan Stanley Smith Barney to adhere to the same fiduciary standard as investment advisers.

Brokers currently must show only that a product is “suitable” for a client. They are not held accountable if an investment recommendation winds up losing a client money.

The Securities Industry and Financial Markets Association, the main lobbying group for brokers, says it supports a higher standard for brokers and warns that latest bill has the potential of hurting consumers.

“We are, at a high level, comfortable with the bill,” said John Taft, U.S. wealth management chief for Royal Bank of Canada and incoming SIFMA chairman. “The next chapter is going to be the rule-making process and how this gets implemented. No one knows what the impact of this will be.”

Taft told Reuters that most of the commissioners have shown themselves to be serious about adopting a higher standard of customer care.

“The change will be meaningful,” said Taft. “It has to be done right. It could be transformational, on the one hand, but it should not restrict client choice.”

Tittsworth’s group, as well as state securities regulators and consumer groups, would like to see that existing standard extended to brokers.

Until last year, the brokerage industry objected to being held to the same standard, which would restrict their ability to sell their own products — such as IPOs the firm helped underwrite.

“It’s important that this standard is constructed in such a way as to not deprive our clients of products and services they want, such as IPOS and access to our bond inventory,” said Jim Wiggins, a spokesman for Morgan Stanley.

The existing investment adviser standard “could lock small investors out of receiving advice, because it would just be too expensive,” said Hilliard Lyons private client services head Daryl Metzger.

It is cheaper for investors to work with a broker who earns commissions rather than an asset-based fee, he said.

Taft said SIFMA’s primary worry is that brokers would be restricted from offering a full range of services — from trading and research to money management and estate planning.

“Customers want to go to wealth management firms and get all those services in one place. Whatever the fiduciary standard of care, it needs to preserve client choice,” Taft said. “If you don’t, you’re hurting investors, not helping.”

Independent advisers contend that their “do no harm” standard is still clearly best for clients.

“When’s the last time you saw a Merrill ad that didn’t preach advice, guidance, trust or some other similar theme? They want to walk the walk, but not the (fiduciary) standard, and that’s just plain wrong,” said Rick Brooks, a Solana Beach, California-based adviser with Blankinship & Foster LLC.

SEC Chairman Mary Schapiro’s previous job as FINRA chief executive has fiduciary advocates concerned.

Rudy Adolf, founder of Focus Financial, which has bought stakes in advisory firms, contends Wall Street brokers would sacrifice billions of dollars of revenue from in-house products if they were beholden to the investment adviser standard.

“I’m very nervous that the standard will be watered down in order to protect the antiquated business models of the brokerage industry,” Adolf said.

Reporting by Helen Kearney; additional reporting by Lauren Young and Joseph Giannone, editing by Matthew Lewis

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