The Financial Planning Association dug itself into a hole by becoming a plaintiff in a national legal challenge to “The Merrill Lynch Rule.”
The rule, adopted in 1999 by The U.S. Securities and Exchange Commission, exempted “stockbrokers,” representatives of large full-service investment organizations, sometimes called “wirehouses,” from registration as “investment advisors.” The Financial Planning Association and The Consumer Federation of America spent tens of thousands of dollars challenging the SEC rule in federal court. They obtained a favorable ruling in 2007. From that date forward, “stock brokers,” individually and collectively, were forced to begin a year-long process of re-registration, endless explanations to clients, and a 300 percent increase in routine account paperwork. No wonder, then, that large firm representatives found no value in FPA, and its membership declined from 23,990 in 2008, to 22,816 in September 2013, during a great bull market and a period of increase in the number of financial services professionals.
I recall an early skirmish in one of those early years. I received a survey. It asked “do you agree with the board’s decision to challenge The Merrill Lynch rule,” which might have been read: “Listen. Help us out. We made the decision. Give us support.” The FPA and its corporate friends then went on to convert the moral issue to a divisive commercial effort. A full-page advertisement in The Wall Street Journal, and a brochure published by TD Ameritrade, essentially declared, “We are better. We are true advisors. They are not. We put clients’ interests first. Nope, they do not. We live by ‘the fiduciary standard,’ but they only sell product.” These messages drove a wedge between FPA members who view themselves as impartial financial planners and “stock brokers” who, were it not for this internal war, would otherwise find a friendly home within The Financial Planning Association.
Most certainly, the moral element is worthy. Every financial services professional should place the interests of clients first. The problem is that no amount of law or regulation can, itself, achieve that goal. Client/investors know that. They understand that the primary component of honesty and fair dealing is personal character, the moral standards and personal life view of the persons with whom they do business. “The public,” meaning the masses of clients, never identified with the controversy; investors who became aware believed they were observing only competition within the industry. “The public” did not charge forth, claiming loss or mistreatment; “the public” did not abandon previous relationships because of the circuit court decision. As a subdivision of the financial services industry, FPA was spinning its wheels, with no gain for “the public,” but considerable operational pain for the big firms.
The circumstance lives on. In column after column, and speech after speech, advocates of “the fiduciary standard,” continue arguing for a new SEC rule that would bring big-firm representatives under a formal mandate to put customers’ interests first. The big firms resist, for a logical reason. If a big firm purchases $100 million in bonds from a school corporation, then sells those bonds to its clients, who can say whether the interests of the firm and the school corporation are less important than the interests of persons who buy the bonds? The same is true of initial public offerings of all sorts, including taxable and tax-free bonds, common stocks, hedge funds, limited partnerships, new mutual funds and commodity trading plans. The representative who sells these investments must determine “suitability,” which includes the questions “Can this client afford the risk?” and “Does the client understand the risk?” If the selling agent does not make a sound judgment, he becomes subject to claims at arbitration in which a fiduciary standard is thoroughly considered by the arbitrators.
The Financial Planning Association could be and should be a comfortable home for every financial services professional. The code of ethics should be taught to every person who represents financial products to the public. The continuing education element is a powerful way to keep up, and the friendly association between competitors is both personally enjoyable and professional enlightening.
Therefore, the war should cease. Leave the battle to impartial representatives of “the public,” such as Consumers Union, George Will, the AARP, or any organization with extensive public membership. We should stay out of the battle. Our professional magazines should cease the endless commentary. Instead, we should apologize for starting this intramural and futile battle, or, at minimum, remain silent, so that our association can again seek the friendship of all who serve the public. We should honor and invite every practitioner who utilizes the financial planning process.
John Guy, CFP, is past president of the Indianapolis chapter of the IAFP, and past national director. He was a local director of FPA of Greater Indiana. He is a securities industry arbitrator and author of Middle Man, A Broker’s Tale.