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Brokers: fiduciary duty will cost consumers

By Sheyna Steiner ·
Tuesday, November 9, 2010
Posted: 3 pm ET

If you ask some broker-dealers, as well as insurance agents, a uniform fiduciary standard is not in consumers' best interests. Disclosing commissions and increased transparency of fee structures will result in higher costs for consumers as well as reduced choice. Consumer advocates disagree.

The Dodd-Frank Act, signed into law in July, empowered the Securities and Exchange Commission to study the issue of fiduciary duty for 6 months and apply the higher standard of care to broker-dealers and other financial service professionals employed in an advice-giving capacity. Broker-dealers are currently obligated to apply suitability standards to their clients.

The suitability standard mandates that brokers verify their clients' investing experience, investing goals and risk tolerance before recommending investments. The fiduciary standard is more stringent -- it instructs advisors to put the client's best interest ahead of their own and disclose conflicts of interest.

At the annual meeting of the Securities Industry and Financial Markets Association, or SIFMA, brokerage executives made a case against a universal fiduciary duty for all brokers and investment advisors, Reuters reported on Monday.

The Reuters story, "Brokerages say fiduciary rule may impact choice," quotes Chet Helck, chief operating officer at Raymond James Financial, as he expresses some confusion over how investment advisors adhere to a fiduciary standard when their client pursues strategies that are not in their own best interest.

"A very strict interpretation could not accommodate activities that a client wants," he said.

 The other issue raised by brokers and SIFMA itself is the cost of service. A study commissioned by SIFMA found that investors pay 25 percent to 75 percent more for fee-based service compared to commissions.

On, the story "SIFMA: Flawed fiduciary duty could smack investors" details the SIFMA study.

Barbara Roper, director of investor protection at the Consumer Federation of America, criticized the study, arguing that no one wants to get rid of commission-based services. According to the Consumer Federation of America, the Frank-Dodd Act specifically states that commission-based payments do not violate the fiduciary standard.

The SEC has until January to decide whether or not broker-dealers should be subject to fiduciary standards.

In an interesting twist, in late October the Department of Labor proposed an amendment to the Employee Retirement Income Security Act, or ERISA, that would categorize broker-dealers as fiduciaries when they give advice to retirement plan participants and receive payment, reported on Tuesday.

The amendment would affect brokers advising clients about their IRAs and retirement plans that fall under ERISA, such as 401(k)s. More on that here.

All things being equal, would you rather talk to an investment advisor or broker who must disclose conflicts of interest or one who does not?

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Blue Haven Capital
November 22, 2010 at 10:51 am

I laughed when I read the headline that fiduciary duty will cost investors...and laughed a bit more when I read the study, which can be downloaded here:

Page 4pdf: ""Fee-based services are 23-37 bps more expensive than brokerage"
I am guessing that this measured visible fees from fee based services versus visible fees of commissions. But what about the additional (and hidden) 25bps 12b1 and the 150bps internal fund expense that exists on THE SAME FUND that I can access for 0bps 12b1 and 60bps internal expense? It isn't the commission rates nowadays that kill investors (trades are +/- $9 each all over the place) it is the 150bps of hidden fees that kill return.

Page 19pdf: "Primary market: Investors have access to securities with no explicit mark-up during limited retail order periods"
Is SIFMA seriously equating "no explicit mark-up" with "no mark-up"? Another example of a fee, being paid by the investor, that is ignored because it is not "explicit" and transparent.
The US Treasury released a study in June 2010 showing that BAB underwriting fees averaged 62 1/2bps and tax exempt muni underwriting fees averaged 62bps. That study can be read here:,%2006-10-10.pdf

Page 23pdf: Box "B" claims the average affluent investor pays 53bps per year in commissions. What isn't examined is the overage that investor is paying in the instruments he or she is invested in. Are the mutual funds being run with 30bps internal expenses or 100bps? Are there 25bps 12b1 or not? The high internal fees of any funds used can easily equate to an additional 100bps.

So, 62bps here, 100bps there, 25bps somewhere else are all getting ignored by the study.

Granted, a fee only advisor cannot profitably serve an investor with $20,000 on 60bps a year in fees. That investor may well be better off going to a broker who averages 2% or so in combined implicit and explicit fees.

But a relationship of $500k and higher is probably saving 100bps or more by using a 60bps advisor. That investor gets institutional access to bonds through the advisor, institutional class access to funds through the advisor, full fiduciary duty, and fully transparent fees.

Shame on SIFMA for its lack of transparency!