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Are Parts of Wall Street Being Two Faced?

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Are Parts of Wall Street Being Two Faced?

Is Wall Street being a little two faced about putting the best interest of clients first?

Review the following statements, more like it at the end of this article and my comments below, and let me know.

Related to my last personal blog post about the Consumer Financial Protection Bureau, a lot of stories are being written about the need, or lack of need, for investor protections.

One debate that is being watched closely by the investment industry and investors is the Department of Labor (DOL) Fiduciary Rule.

In simple terms, this rule was put in place by the DOL with the intent of holding investment and insurance firms to a fiduciary standard related to retirement assets.

If it still goes forward, and it is looking more unlikely, it would require financial services firms to put in place measures to make sure they are putting clients’ interests ahead of their own and that they are more carefully disclosing conflicts of interest, selling incentives and fees for only retirement assets (notice the bolded words).

My strong bet is that if you asked investors if this was a good idea, the vast majority would say, “yes”, but that it should cover all of their assets, family trusts and investments for their local charities.

How is the investment industry responding?

Recently the new acting head of the Securities and Exchange Commission, which I would argue should be an investor protection agency, said the DOL Fiduciary Rule was “terrible”.

I agree that the Fiduciary Rule has some flaws (see my bolded words above) and also agree with his following somewhat buyer-beware comment:

“If someone calls themselves a financial advisor, that means absolutely nothing.”

In addition, I appreciate him pointing out that when brokers use the term advisor, it can create “a lot of the confusion” due to the fact that many are really 100% commission sales professionals (see some of the financial industry agreement on this below).

To say, however, that the Fiduciary Rule was “never about investor protection” and that it is a “terrible, horrible, no-good, very bad rule” was quite disappointing.

Last year, I wrote a post on my firm’s blog titled “Is Bad for Business Sometimes Good?”.  It pointed out how the Fitch investment credit rating firm warned investors that the DOL Fiduciary Rule might have a significant negative impact on the profitability of many Wall Street firms.

The following is a direct quote from the Fitch report:

“The proposed rules raise the risk of regulatory enforcement and or trial bar litigation, and will likely force RIAs to do more to prove that a client’s product choices indeed meet the individual’s best interests.  The new proposals could curb the willingness of agents to promote complex and higher fee products.  Asset managers and insurance companies would also bear responsibility for examining distribution policies and commission structures paid to independent and affiliated distributors that sell many of the investment products reaching retirement accounts.”

Wall Street knows this well, but also realizes that, because the idea of a firm acting in a client’s best interest is appealing to consumers, they might have a big public relations problem.

Investment and insurance firms want to promote themselves as fiduciaries acting in the best interest of clients, but their business models often aren’t built this way.

How are they responding?

Review the following info-graphs put together by an organization that some financial industry associations call “no-good“, and then let me know your answer to the following question.*

Should this somewhat two-faced industry behavior be called “terrible” and “horrible”?

* The graphs above were prepared by the Consumer Federation of America. For more details on their accompanying white-paper that includes references and disclosures please click the following:
http://consumerfed.org/wp-content/uploads/2017/01/1-18-17-Advisor-or-Salesperson_Report.pdf
http://consumerfed.org/wp-content/uploads/2017/01/1-18-17-Advisor-or-Salesperson_Appendix.pdf
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