Much buzz today as the head of the Securities Exchange Commission tells Congress her agency is moving forward with a new improved standard of care in the finance sector. See: Sec chief forges ahead on financial advisor regs.
It has been nearly 5 years since the 2010 Dodd-Frank Act gave the SEC authority to create regulation that would impose a uniform fiduciary standard of care for retail investment advice. In the meantime heavy lobbying from the fee-drunk financial industry has managed to stall any meaningful reforms.
Throughout North American and most of the world, brokers, investment banks, fund sellers and insurers are currently held to a low-hurdle ‘suitability standard’ where commission models and conflicts of interest routinely place sales targets ahead of the best interests of their customers. Trusting customers are referred to as “low hanging fruit”–a “distribution channel” for the firm’s underwriting issues– amid sales incentives that push for what management likes to call “a larger share of the customer’s wallet.”
At the opposite end are registered investment advisers who are held to a “fiduciary standard” which legally requires them to place the best interests of the client ahead of their own profits, not collect secret fees, and disclose and remove themselves from any conflicts of interest with the client.
The trouble is that in the 1980’s the financial business began rolling back the 1930’s enacted divisions between financial sales and advisory services. Continuing in the 1990’s, the relentless chipping away and eventual elimination of Glass Steagall divisions, allowed for financial conglomerates to style their sales model as financial advice, without having to accept any of the fiduciary obligations.
The result is a financial sector now so incestuous, so conflicted and so used to freely raping and pillaging the savings of its customers, that it has achieved an unprecedented pass to harvest all of the profits with none of the responsibility for client harm. Nay, not even for their own financial harm. As seen since the 2008 financial crisis, the sector has been repeatedly bailed out by central banks and governments, enjoying near perfect immunity from all the downside consequences of their own reckless actions.
SEC head Ms. White told Congress today that “it’s beyond time” for new rules on financial advisers. Nothing could be more accurate; but the dark truth is this: the regulatory heads- Obama, the SEC, and the Department of Labour are all swaying to industry pressure and talking about a new more ‘flexible’ fiduciary standard. One that allows for commissions, enhanced financial incentives for certain products, and conflicts of interest with the client, so long as they are ‘disclosed’. In other words, a standard which is improved in name only.
Behind the scenes, the financial lobby is working to gut the critical tenets that were established by the courts through decades of jurisprudence and equitable principles. They think they can bend ‘fiduciary’ to serve their own best interests and still sell it to the public as an improved standard.
If this is allowed, the industry will once more succeed in queering a long standing ethical principle into just another sales jingle, as they have done with the word ‘adviser’ over the past 30 years. In the process, financial stability and our entire social fabric will continue to the pay crushing costs for their insatiable profits.
This madness has to end. We simply cannot afford it in any way.