Securities industry now getting behind reform

  • Article by: NEAL ST. ANTHONY , Star Tribune
  • Updated: November 13, 2009 - 4:23 PM

It is in favor of a uniform standard covering providers of investment advice.

Financial reforms working their way through Congress are designed to make sure the big players who sell mortgage securities, derivatives and other financial products have more of their own capital backing their assets. They also would bring SEC regulation to big hedge funds and better police the sale of mortgages and credit cards.

Still, how do you preclude the next Bernie Madoff? During the recent financial meltdown, the rich demonstrated they're about as gullible to a too-good-too-be-true sales pitch as the unwitting suckers who were sold toxic mortgages.

Recently, the U.S. securities industry, representing the traditional brokerages, has moved to embrace the main tenets of reform, including alignment with financial planners and money managers on a single federal standard defining their fiduciary duty.

Financial planners and registered investment advisers, or RIAs, who may invest client funds at their discretion as long as it fits their prospectus, long have argued that traditional brokers are bound more to their firm's interest in being commission-driven intermediaries.

This fall, the securities industry, led by John Taft, chief executive of RBC Wealth Management, who is also incoming chairman of the Securities Industry and Financial Markets Association, has come out in favor of a uniform federal standard governing all providers of personalized investment advice.

"There's no question that this will make the rules clearer," said Taft, who testified recently before the House Financial Services Committee. "We say let the SEC write the rules that will supersede all the state regulations and the different court decisions that have established case law over the years. The securities industry supports the harmonious standard of care for personal investing provided it doesn't compromise client choice."

In other words, brokers still would be allowed to execute customer orders, even if the brokers don't agree with their client's transaction.

Taft is probably the right guy to be carrying water for an industry tarnished by executive-office scandals, arrogance and greed at the highest levels, all of which led to the bailouts on Wall Street over the past 16 months. Those transgressions had little to do with individual brokers or mainstream wealth managers.

Minneapolis-based RBC Wealth Management is part of Canada's largest financial conglomerate, RBC Financial. This has been a well-run outfit, perhaps reflecting a longer-term outlook and Canada's more conservative financial culture and stricter regulations. To be sure, there were ethical professionals working at the Merrills, Morgans and Citis at the apex of the financial meltdown.

The fee-only financial planners long have said that brokers skate on their fiduciary obligation -- is it to the firm or the client? Yet good brokers always put client interests first. And increasingly, brokers have formed their own small registered investment firms to manage client money within the parent firm, subject to the same rules as planners and money managers.

"We took up the call for reform and we agreed that the broker-dealer and RIA business have come closer in terms of services to individual clients," said Andrew DeSouza, a spokesman for the securities industry in Washington D.C. "If you provide personal investment advice, you should fall under one federal fiduciary standard."

Down the street at big Ameriprise Financial, home to thousands of financial planners nationally, they welcome the brokerage industry movement.

"Individual investors should be able to have confidence that their financial services professionals, regardless of the type of firm, have their best interests at heart and that they will be informed of conflicts of interest," said Joe Sweeney, president of Ameriprise's wealth management products and services. "This proposed change would align all financial services firms with the fiduciary standard that Ameriprise advisers already meet, so we support it."

Ross Levin, a veteran owner of his own fee-only financial planning and money-management firm in Edina, said, "The broker-dealer standard up to this point has been 'client suitability' for an investment, not necessarily 'their interests first.' It's been a bone of contention between broker-dealers and registered investment advisers.

"More and more brokers are going toward the 'RIA model.' But all of us have conflicts. It's how you manage the conflicts. There are differences in how you get paid and the advice you render. The client needs to feel that his interests are paramount and know how you get paid. Disclosure is the critical issue."

Neal St. Anthony • 612-673-7144 •

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