|Warren S. Hersch|
Establishing a harmonized fiduciary standard for registered investment advisors and broker-dealers, the focus of a current
The problem lies in "all other considerations." RIAs and broker-dealers operate according to different models, one of which (the former's) lends itself well to a fiduciary standard. That of the latter would be upended by having to jettison the current suitability standard governing broker-dealers, requiring their FINRA-registered reps to comply with new regulatory requirements for which they're ill-suited.
One reason: A fiduciary standard would be problematic for reps, most especially career agents, who source product primarily (if not exclusively) from a single carrier. That makes demonstrating that they're acting in the client's best interest–a requirement of a fiduciary standard–more difficult. Add to this the fact many reps derive compensation only from commissioned-based sales and the challenge becomes all the greater.
Moving to a harmonized standard would ultimately expose B-Ds and their reps to increased legal liability, driving up rates for errors and omissions insurance and, thus, the cost of doing business. The result would be an exodus of registered reps from the field–leaving an even greater share of an already underserved middle market without a financial service professional to help them with basic planning needs.
The deadline approaches
That would be disastrous. For evidence of this, consider the experiences of advisors overseas. As I reported in an exclusive from the
Dubbed the Retail Distribution Review, the legislation imposes new educational requirements on advisors. The law also affects commissions: Advisors will only be able to accept fee-based compensation on new business. In respect to existing business, clients must be given the opportunity to discontinue renewal commissions if they believe they're not receiving adequate advice or service.
The same downsizing of the advisory field force could happen here, an outcome that could be as bad for the high net worth as for the middle class.
If the cost of regulatory compliance and E&O coverage were to rise as a result of extending the RIA fiduciary standard to broker-dealers then, said Ehinger, a likely outcome would a significant reduction in the number life insurance professionals who sell variable annuities, variable life and variable universal life products — the last widely used by the affluent for both tax avoidance and investment purposes.
To be sure, many reps who elect to drop their FINRA registration to escape
A better way
Rather than forcing reps to abide by a new standard that is of questionable value from a consumer protection standpoint, a better option, as Ehinger indicated, would be to enhance disclosure requirements for reps, both in respect to their role as financial professionals and the method by which they receive compensation. Consumers will then be less vulnerable to financial abuses — precisely the objective that
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