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Trigaux: Wall Street wants big profits, 'good enough' advice

Raymond James CEO Paul Reilly supports the “good enough” standard for advice. 








Published Mar. 13, 2015

A new front is quietly raging in a lengthy war.

On one side: government and consumer groups that want investment advisers held to a higher standard designed to benefit clients. On the other side: Wall Street firms eager to sustain their cherished "good enough" standard of investing advice that has driven the gravy train of commissions for so many stock brokers.

Often at their clients' expense.

The entrenched standard has inspired such Wall Street jokes as this oldie but goodie:

A stock broker escorts a prospective customer around a stock brokerage and then to a nearby dock, where the stock broker boasts: "This is where our yachts are moored." The potential customer nods, then asks: "Impressive. But where are the yachts of your clients?"

There's a reason people who want to make lots of money become stock brokers. In 2014, despite falling profits, the average bonus on Wall Street rose to $172,860.

Last month, President Barack Obama reignited the touchy subject of standards, proposing tougher rules on investment brokers who handle retirement funds. He said such rules would limit hidden fees, "back-door payments" and the kinds of conflicts of interest that eat into the savings of middle-class Americans.

The president called on the Department of Labor, or DOL, to revive plans to require retirement advisers to put their clients' best interest before their own profits. The AARP and other groups keen on stronger financial consumer protections say basic investors are not aware of the commissions their advisers earn when getting them to enroll in retirement plans that qualify as suitable but may not be the best possible choice for clients.

Needless to say, Wall Street is up in arms again. Among those taking the lead: Paul Reilly, CEO of the regional Raymond James Financial investment firm based in St. Petersburg.

According to a late January email sent to Raymond James employees, Reilly called a White House memo supporting the Labor Department "an example of biased and distorted research (that) impugns the integrity of the work our advisers do every day to help clients achieve their financial goals."

Reilly wrote that he was working with the industry trade group SIFMA — the Securities Industry and Financial Markets Association — in its lobbying efforts, "and rallying our senior management team and all of our associates to oppose the DOL's proposal." Details of Reilly's email appeal to employees were first reported in several investment industry publications.

Wall Street's formidable opposition quashed a similar effort after the 2007-2009 financial meltdown to standardize the care that investors receive from financial professionals at the federal level.

Once again at issue is the pitting of the "suitability" against the "fiduciary" standard. They are two different standards that govern advisers and financial planners. The suitability or "good enough" standard requires that investments recommended by advisers simply fit a client's financial objectives, time horizon and experience.

And if such investments also happen to generate mediocre returns to the client but big commissions to the adviser? Well, that's okay under the suitability standard.

Advisers held to the higher fiduciary standard are legally obligated to recommend investments that are only in a client's best interests, whether or not they match the financial interests of the adviser.

Barbara Roper, director of investor protection for the Consumer Federation of America, wants all financial advisers to be held to the fiduciary standard so consumers are more likely to receive better investment recommendations. The issue is critical because, with so many Americans way behind in their efforts to build an adequate retirement nest egg, every dollar counts.

Supporters of the DOL's efforts scoffed at the content of Reilly's email, one recent news report in On Wall Street said.

"This is as Orwellian as it gets," stated Roper in the story. "They will serve their clients best by defeating a regulation that would require them to do what's best for their clients?"

Advisers offering suitable investments have too much leeway, she argues. It means an adviser can pitch a D+ investment with a high commission, even when an A+ alternative exists at lower cost to the client, and still meet the standard.

The brokerage industry argues that curtailing the suitability standard advice based on commissions will hurt middle-class Americans who lack enough assets to be attractive to financial planners who adhere to the higher fiduciary standard. Such advisers typically charge a flat fee based on the size of assets they manage and, Wall Street argues, people with smaller amounts to invest would get squeezed out and have to fend for themselves.

The industry also criticizes the government's latest decision to move ahead without the involvement of the Securities and Exchange Commission. Under the Labor Department plan, brokers would have to follow two sets of rules — a fiduciary standard for retirement accounts, a suitability standard for all others — that would end up further confusing investors.

Many brokers, no doubt, do the right thing to keep their clients happy. That is, of course, a much easier thing to do in a bull market that has driven the Dow from less than 7,000 in 2009 to about 18,000 this year.

I've got to hand it to the Wall Street powers. They are rich. They are not stupid. They know a good gig when they see one.

How many other industries enjoy a seal of approval to be well compensated by giving customers merely mediocre advice?

Orwellian? Sure. Welcome to Washington. Don't bet on a victory by the White House and consumer groups on this battle.

Contact Robert Trigaux at rtrigaux@tampabay.com. Follow @venturetampabay.

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