WASHINGTON — By law, financial planners and investment advisers have a fiduciary duty to their clients, the consumer. However, broker-dealers and insurance brokers who work with them have convinced the Senate Banking Committee, at least for now, that they deserve an exception from this duty to put the client first.
Under the sweeping overhaul of financial regulation passed by the House of Representatives in December, broker-dealers and insurance brokers that offer financial advice to consumers would be bound by the same duty to put client needs first as financial planners and others who give investment advice to consumers.
The move to create a fiduciary duty for them gained steam, in part, because of retirees were sold risky variable-rate annuity plans that often weren't in their best interests but brought lucrative fees to the agents who sold them.
In the Senate, however, where Democrats are trying to move their own version of a financial regulation overhaul, the broker-dealers and insurance brokers bought themselves time. The bill crafted by Senate Banking Chairman Christopher Dodd, D-Conn., orders the Securities and Exchange Commission to study the issue and report back.
Problem is, the SEC doesn't need to study the issue. It already has, and concluded that consumers should know that their financial advisers put their needs ahead of what's best for the financial-product salesman.
"Such a standard underscores the importance of ensuring the integrity of securities advice provided to investors, regardless of the label applied to the professional providing that advice," SEC Chairman Mary Schapiro wrote to Dodd on March 22.
In a March 9 letter to Dodd, she said "I believe that any legislation in this area, at a minimum, should provide for a strong, uniform fiduciary standard of conduct. When advising investors, investment advisers and broker-dealers must at all times put investors' interests first."
One company fighting hard for the status quo has been Edward Jones, a St. Louis-based national investment firm whose motto is "Making Sense of Investing."
Consumer advocates allege that Edward Jones tried to do the opposite of its motto, confusing the investment debate by providing what they call false information to lawmakers preparing the legislation.
The Edward Jones document, entitled The Fiduciary Dilemma and obtained by McClatchy, warns of "unintended consequences" from "ambiguities" in determining what constitutes a fiduciary duty.
Never mind that most players in the financial world are subject to this investor-first duty. The Edward Jones letter suggested that the legislation could end commissions for insurance brokers who sell securities and could even prohibit them from selling their own products. The House legislation would do neither.
"We're not saying we're opposed, but we think we need further review to make sure we fully understand it and what the implications will be," said Jesse Hill, the director of regulatory relations for Edward Jones, in an interview.
Broker-dealers are concerned that an unintended consequence of the legislation could be to limit commissions, a staple of this segment of the financial sector.
Broker-dealers execute the sale or purchase of a stock, mutual fund or other financial instruments on behalf of an ordinary investor. These broker-dealers, either independent firms or part of big chains, also manage accounts on behalf of clients.
Many insurance brokers, regulated on the state level, sell annuities — which take a lump sum of a retiree's investment nest egg and disperse it over fixed or variable periods. Insurance brokers selling such securities must be a registered agent of a broker-dealer, and since broker-dealers have no fiduciary duty to clients, neither do these insurance agents.
"If insurance agents have to act in the best interest of their customers, they will go out of business? What does that tell you what (they) think about how they do business," said Barbara Roper, the director of investor protection for the Consumer Federation of America.
Added Cristina Martin Firvida, the director of economic security in the government affairs office of AARP, the seniors' lobby: "They don't currently have an obligation to advise you on what is best for you. That seems common sense to us."
Consumer groups are fighting the lobbying campaign of broker-dealers and insurance trade groups such as the National Association of Insurance and Financial Advisers, which declined comment for this story.
Advocates hope to amend the legislation on the Senate floor in the weeks ahead. They say an amendment will be offered by Sens. Robert Menendez, D-N.J., and Daniel Akaka, D-Hawaii.
AARP estimates that 5 million seniors fall victim to financial fraud annually, much of it in the annuities market, a financial product frequently sold by insurers.
"I don't think it's age-based. I just think you go to where the money is, and folks who are nearing retirement are more likely to have a lifetime of savings," Firvida said. "There's no transparency (for consumers). Why would they know that an adviser has a different responsibility than a broker?"
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