Bloodied But Unbowed

Delay, divide and conquer is the legal strategy of conflicted financial salespeople.

They are targeting The Fiduciary Rule designed to protect investors from financial predators.  Their sleazy tactics drew blood last week.

In a date that will live in financial infamy, a U.S. Appeals court in Texas shot down the Labor Department’s rule. “Too broad and unreasonable,” according to the judge.


“Narrow and reasonable for salespeople looking to deceive the average American worker.”

My colleague, Barry Ritholtz nails it. “The Rule is unreasonable,” said a judge, whom I now deem is obligated to have all of his assets managed now and forever by a retail stockbroker governed only by the suitability standard…”

A final showdown in the Supreme Court looks inevitable.

The battle isn’t over. The forces of good are amassing their allies for a counterattack.

The CFP Board of Standards held the line with their strict interpretation of the rule.

Brokers are pressuring the board to wait for the S.E.C. to propose its own fiduciary standard before committing.

Wirehouses account for 18,200 out of the 80,000 CFPs the proposed code would impact.

Unlike the brokers and insurers, the CFP Board is a non-profit established to benefit the public. They have an independent obligation to set high standards for CFPs.

Eight broker-dealers want a delay. The Financial Services Institute and SIFMA agree. It’s no coincidence these two organizations were plaintiffs in the Texas lawsuit.

It’s not surprising that both lobby to block a rule that would benefit retirement investors. Opaque disclosures and expensive products define their client’s business models.

Their objection to the CFP Board’s definition of financial planning listed below signifies their true intentions.

“A collaborative process that helps maximize a client’s potential for meeting life goals through ‘financial advice’ that integrates relevant elements of the client’s personal and financial circumstances.” 

Their take might look something like this.

“A secretive process that severely limits a client’s potential for meeting the average American’s needs due to a non-transparent business model overrun by a high-fee and unnecessary investments designed to garner high returns for stockholders rather than clients.”

On a second battlefront, brokers are attacking the SEC for trying to force them to follow the law.

The Investment Advisor Act of 1940 states a broker is not an investment advisor if the advice they give to a client is “solely incidental” to a sales transaction. If a broker wants to give personalized financial advice they have to be a fiduciary and register as an investment adviser.

Brokers mock this distinction by calling themselves financial plannerswealth managers or retirement specialists. These misleading titles hide the fact they are compensated by “moving product.”

Kurt Schact of the CFA Institute sums up this charade.

If you are going to do personalized advice and call yourself an advisor, you just have to give a fiduciary duty; that’s all there is to it. If you want to be a broker-dealer, you still want to be just a salesperson; that’s fine, but you can’t call yourself a financial advisor.”

The National Association of Insurance and Financial Advisors disagrees.

“NAIFA members are acting in the best interests of their clients no matter what they’re called – if they weren’t, they would lose their clients.”

Say What?

  1. Non-fiduciary advice costs Americans about $17 billion a year.
  2.  Most Americans have no idea of the difference between the fiduciary and broker suitability standard.

Clients have no clue what they are paying and their “advisor” has no legal obligation to tell them.  Ignorance isn’t bliss; it’s just plain old ignorance.

If investors don’t “stay woke,” they will lose much more than a court decision.

Sources: “Title Reform Has Everyone Talking,” by Mark Schoeff Jr., The InvestmentNews;  “CFP Board Won’t Bow To Pressure To Defer Fiduciary Standards,” by Tracey Longo, Financial Advisor, March 1, 2018.