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MAKING CENTS OUT OF THE NEWS
Blog #08
(February 25th, 2010)
A BLANKET FIDUCIARY STANDARD? IT'S ABOUT TIME!
By Tom McAllister, CFP®
You wouldn't know it from the press, but Congress has been working on a few things other than health care, energy, and jobs. One of these is reforming our financial community, particularly those large investment and commercial banks which were found “too large to fail” in the “almost” meltdown of 2008-09. Even though nearly all the TARP loans have been repaid, the Obama administration is pushing for a substantial tax on these financial giants, apparently to punish them for getting in trouble. (It's ironic that several of the big banks were pressured to accept TARP loans whether they needed them or not!)
While I have no serious objection to an FDIC-type setup, featuring a modest tax on each institution based on its financial resources and administered by the U.S. Treasury, what is being proposed seems to be more vindictive than stabilizing.
Interestingly, the two auto companies, GM and Chrysler, who received $50 billion worth of government bailout money, are to be exempted from the sort of tax the government proposes to levy on the financial institutions who accepted government help. (Forgive the irreverent thought, but could this possibly be related to the fact that the auto unions now own a significant part of the two companies?)
In this week's blog post, I'd like to focus on a facet of the proposed financial institution reform measures that is dear to the hearts of those of us in the in the Certified Financial Planner community. As a profession, we have a fiduciary responsibility to our clients. As fiduciaries, we must always put clients' interests ahead of our own. Other professions, including, medicine, law, and accounting, hold their members to similar restrictions and standards.
In addition to serving as a Certified Financial Planning practitioner, I, like most of my CFP® colleagues, am also a registered investment advisor. For generations, financial professionals in the New York Stock Exchange community have been exempt from the fiduciary standard. Instead, financial advisors and stockbrokers who work for stock exchange member firms are held to what is called a suitability standard. That means any transactions suggested to clients must be “suitable” for those clients. (Of course, the transaction might also be in the broker's best interest in that they receive a commission if the recommendation is followed.)
I was a NYSE broker and manager from 1962 until 1975, and the suitability standard was, in fact, quite appropriate for the type of work we did in those years. Beginning in the 1980's, however, NYSE member firms began focusing more and more on AUM, Assets Under Management. Today, the majority of most stockbrokers’ compensation comes from providing services which are identical to those provided by registered investment advisors.
Congress, and particularly Congressman Barney Frank, chairman of the House Financial Affairs committee, is now promoting the concept of holding stockbrokers to a fiduciary standard when they are acting as investment managers. In my view the proposed change seems very fair. However, the large nationwide “wire houses” are adamantly opposed to this change, as it creates conflicts of interest when brokers offer their clients products sponsored by their employer firms. It would appear that a blanket fiduciary standard is in the cards soon. To this observer, acting under the fiduciary standard for thirty years now, it is about time!
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