The vote was one of those party-line affairs — like the 40-some efforts to repeal Obamacare — to approve legislation that will never get through the Senate and would encounter a White House veto if it ever did pass both chambers.
This bill — misleadingly named the Retail Investor Protection Act — would block the Securities and Exchange Commission and the Department of Labor from requiring brokers and retirement account managers to follow the same rule as investment advisers to put client interests ahead of their own.
Money columnist Darrell Delamaide.(Photo: H. Darr Beiser, USATODAY)
Say, what? There's something wrong with that?
Well, according the army of financial lobbyists who persuaded House Republicans and 30 of their Democratic colleagues to support the bill, requiring brokers to follow a so-called "fiduciary standard" would add so much cost that it would make financial advice prohibitively expensive for small investors.
That's great. So you can continue to afford advice to buy products you don't need or worse, will lose you money so your broker can reap high commissions.
In any case, a recent survey of financial advisers, including brokers, disputed this assertion, with four-fifths of the respondents saying it would not cost investors more for advice if brokers were held to a fiduciary standard.
The SEC has been trying to figure out how to reconcile this fiduciary duty with a business model based on commissions for the better part of three years, while the Department of Labor! has been wrestling with the same issue with regard to retirement accounts.
Neither has been able to put a proposal on the table (a 2010 effort by the DOL was quickly withdrawn).
The new SEC chairman, Mary Jo White, told journalists in passing earlier this month that the agency is working really, really hard on the problem. It's still a "major focus," she reportedly said, as the SEC tries to figure out "where we're going on it."
Although it received new impetus from requirements of the Dodd-Frank financial reform, the effort to harmonize rules for various types of financial advisers predates the financial crisis.
Regulators have long since realized that investors remain blissfully oblivious to the arcane distinctions between registered investment advisers, on the one hand, and broker-dealers on the other.
RIAs, as they are called, most often charge a fee for their advice, rather than take a commission on a trade, and they are legally obliged by the fiduciary standard to put the client's interests first and disclose all fees and conflicts of interest.
Broker-dealers, who generally make their money on commissions, are only required to recommend "suitable" investments — a flexible term that can be stretched to mean many things — but have no explicit fiduciary obligation.
As broker-dealers began offering managed accounts and styling themselves "financial advisers," the distinctions blurred even further and prompted the SEC a decade ago to start studying ways to clarify all this.
Fact is, brokers often try to sell high-commission products such as variable annuities to seniors, even though long surrender periods locking in the funds make this patently unsuitable for them. That is in addition to the classic churning of accounts and other abuses brokers are prone to.
Brokers seek to be "producers" — what they are "producing" is a bigger slice of your savings in the form of ever more commissions, whether you really need or want the transactions that gen! erate the! m. (Remember that old commercial about the beautiful house on the hill built with your savings and the punch line — too bad it belongs to your broker.)
The potential for abuse is even higher in 401(k), and individual retirement accounts (IRAs), regulated by the Labor Department, where managers have even more leeway to churn commissions and embed fees.
California Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, characterized these broker abuses as "self-dealing" last week in opposing the Republican bill.
A fiduciary rule would not stop the abuses, but it would give regulators another, more easily provable ground to sanction offenders and obviate the need of investors to try and parse the difference between advisers.
It's clear enough why an ideological opposition to regulations of any sort or a susceptibility to the blandishments of financial industry lobbyists would lead lawmakers to block a fiduciary rule.
The only question is why they should bother when regulators are proceeding at a glacial pace anyway. At least this latest trophy vote can help raise awareness with the investing public about the risks they face.
Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.
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