Why Wall Street Loathes the Possibility of a True and Meaningful Fiduciary Standard


I don't know what frustrates me more, the shenanigans of Wall Street or the fact that investors constantly fall for them.  I read this article today about a recent letter sent by SEC Chairman Mary Schapiro to broker-dealer executives and I almost fell over.  This is exactly why the broker-dealer community does not want a true and meaningful fiduciary standard and will fight tooth and nail to "harmonize" it, water it down, create exceptions to it and exploit any loophole possible.

When I read things like this I get so frustrated with our industry because it highlights everything that is wrong and detracts from everything that is right about those of us who are trying to push the industry forward towards a true profession.  Not to mention those who truly internalize the high calling of being a fiduciary which I believe is not only the highest legal obligation but the highest ethical and moral obligation we can have because it requires selflessness - placing the needs of those you serve before your own.

Here are some excerpts from Schapiro's letter:

"Recent press articles have reported that some broker-dealer firms may be engaging in a vigorous recruiting program for broker-dealer registered representatives. Reports suggest some firms are offering substantial inducements to potential registered representatives, including large up-front bonuses and enhanced commissions for sales of investment products."

"Certain forms of potential compensation may carry with them enhanced risks to customers. Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given. Those pressures may in turn create incentives to engage in conduct that may violate obligations to investors."

"For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors' interest."


Are you kidding me????  Enhanced compensation could motivate a registered representative to engage in unethical behavior at the expense of their clients???  Say it ain't so!

Is there any doubt that the vast majority of the financial services industry is just one big sales and distribution mechanism?  Should I really get as frustrated when prospective clients "don't seem to get it" and have a hard time discerning the difference between a fiduciary and a financial "salesperson"?  What about the people who seem to understand the difference but just do not think it matters or plain just do not care?  

I am particularly amused and at the same time disheartened by this comment from a reader,

"As she squeezes the small b/d's out we have no alternative but to fill the quotas mandated by the big shops. We are forced to bend the rules a little bit to survive."  

There is always an alternative to doing what you know may be wrong, although it's easier to blame someone else and feign being "forced" to do something that straddles the line of ethical behavior than to take personal responsibility.  Anyways, they are only bending the rules "a little bit" so what's the big deal?

Even further, the last sentence is the essence of what it means to NOT be a fiduciary. Notice there is no focus whatsoever on what is best for the client, only what's best for him and what he has to do to "survive." 

You can actually read Ms. Schapiro's letter, here.