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Firms Threaten to Pull Business if Fiduciary Rule is Set

We need to talk about Nevada, where leading broker-dealers including Morgan Stanley, Edward Jones, Charles Schwab, Wells Fargo and TD Ameritrade have sent letters to the state threatening to stop doing business or reduce investment services for investors if a fiduciary standard is put into place.  They argue it is too expensive and the burden of compliance to meet a fiduciary duty would have a negative impact on investors, particularly low-and-middle income investors.

Wait, what?  If the state of Nevada implements a rule which essentially states brokers and advisors must put the best interest of clients above all else, these firms are taking their ball and going home?  That, is unbelievable.  Are they going to leave New Jersey and Maryland as well since both states have put forth fiduciary proposals?  Before we rush to judgement, let’s be fair and look at what Nevada is proposing, maybe we are missing something.

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Well, that seems pretty straightforward and reasonable – that somebody performing any of the above actions or holding themselves out to be a financial advisor will be held to a fiduciary standard of putting the best interest of the client first and foremost.  Morgan Stanley had this to say about it:

Absent substantial changes to the proposal, Morgan Stanley will be unable to provide brokerage services to residents of the state of Nevada.

That seems a bit extreme, does it not?  Regardless, let’s dig deeper.  Maybe the backlash stems from the definition of what actually constitutes investment advice per Nevada’s proposal.

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I don’t see the debate here either.  I guess if I was forced to play devil’s advocate, I could argue that providing security analyses or reports needs more clarity or redefined in order to trigger a fiduciary relationship.  Otherwise, the framework presented here is spot-on.  Think about it this way, re-read the above bullet points but this time in the context of, “An advisor does not have to put their client’s best interest above all else when they provide …”  That definitely feels uncomfortable and misaligned.

There must be more to the story that has these firms and lobbyists all twisted up and bothered.  Let’s keep going and look at the exemptions to the rule and another hot topic which is how a dually registered representative is treated.

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To summarize, Nevada has carved out space for transactional services by limiting the duration of the fiduciary responsibility of the broker or sales rep.  The proposed regulations go even further in providing exemptions.  For example, there is no fiduciary duty applied to brokers who execute unsolicited transactions for clients whose assets they are not managing.  Additionally, the standard does not apply to clearing firms or to those who are executing orders from a registered investment advisor.  Still there is more:

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But yet it’s still not enough for the broker-dealers.  Puzzling, right?  What exactly is behind the threat to leave Nevada simply because they want to implement regulations that require brokers, sales reps, advisors, etc. to put a client’s best interest above their own?  There appears to be ample exemptions and room for everything from selling proprietary products to receiving commissions.  Enter the dually registered representative.

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Now, we might be onto something serious.  Why?  Because what this says is an advisor can’t switch hats anymore.  What most people do not understand is their advisor can be dually registered.  In other words, they can be a broker (who is not a fiduciary nor required to act in such a capacity) and an investment advisor (who is a fiduciary and must act at all times as such duty requires).  Therefore, under current regulation, an advisor can act as one or the other or even switch hats within a relationship based on a variety of factors. 

Nevada is saying no more.  If you’re dually registered, you’ll be held to the fiduciary duty at all times.  This will impact, if not fundamentally change, the business model of these firms, their brokers and sales representatives.  Whereas before, they could technically work with the client however it best suits their business, now there would be a burden of proof to act in the client’s best interest.  I presume this is inconvenient and less profitable and these firms simply don’t want to do business this way.

I do not buy for one second the argument that holding an advisor to a fiduciary duty excludes low-and-middle income investors.  What excludes low-and-middle income investors are the firms and advisors who do not want to work with them unless they can transact business on a commission basis out from under a fiduciary duty.  Why?  Because it is more lucrative and there’s less responsibility to the client. 

To be clear, there is nothing inherently wrong with commissions or the business of brokering transactions in the marketplace.  What is outrageous is presenting the argument these firms are fighting for what’s in the best interest of investors, regardless of account size, by NOT implementing a fiduciary standard – which by the way mandates the client’s best interest remain first and foremost above all else.  Think about that for a second.  It makes zero sense.

AIMA, Inc. is proof a fiduciary model works

Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC registered investment advisory firm located in Savannah, GA.  We provide asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa.  We are fiduciaries and do not impose minimums on our clients because we believe the size of the account should not dictate the quality of service or the depth of the relationship. 

As an independent advisory firm, we get to know our clients and put ourselves in their shoes.  We have a fixed and transparent fee structure that is easy to understand.  Our investment process combines independent research, information from analysts and think tanks and we listen to the companies themselves.  Next, we apply our beliefs and expertise within the markets and ultimately invest for our clients as if we were in their specific situation.  Our business model, growth and support from our clients proves a fiduciary model works if the advisory firm wants it too. 

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