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Exclusive Interview with Investor Advocate Kathleen McBride: SIFMA Seeks to Protect Business Model Where Client Serves Broker, Not the Fiduciary Model Where the Broker Protects the Client

January 22
00:41 2014

After beginning her career on Wall Street as a broker, bond trader and later an investment advisor, Kathleen M. McBride ran financial new-media startups with major financial and media companies. Today, she is an Accredited Investment Kate McBride Close Headshot 300x225Fiduciary Analyst with The Center for Fiduciary Studies, which is associated with the University of Pittsburgh’s Joseph M. Katz Graduate School of Business.  She holds BA degree from New York University and has completed the Investment Strategies and Portfolio Management program at The Wharton School of The University of Pennsylvania.

In 2012 she founded FiduciaryPath, a company whose mission is to ensure that investment fiduciaries are aware of their fiduciary responsibilities and that their investment process is managed to an appropriate fiduciary standard of care. Prior to founding FiduciaryPath, she was a Director at the Institute for Private Investors, Wealth Editor in Chief at AdvisorOne.com, Editor in Chief at Wealth Manager and Senior Editor at Investment Advisor.

She is a founder of The Committee for the Fiduciary Standard and The Institute for the Fiduciary Standard, a nonprofit, nonpartisan think tank dedicated to providing research, education and advocacy on the fiduciary standard’s impact on investors, the capital markets and society.  As a participant in dozens of meetings at the most senior levels of the Securities and Exchange Commission, Department of Labor, Treasury, Congress, Consumer Finance Protection Board, FINRA and more, McBride has a unique perspective on investment fiduciary issues.

FN: Kate, tells us a little bit about yourself and your background. It’s rare that an individual takes on such a strong interest in such a narrowly defined subject like fiduciary matters. What led you to where you are today?
McBride: Well, originally I was going to be a scientist, or a sports reporter – on air. I figure skated four or five hours a day through high school, and after. I was one of those kids on the ice at 5 am. But I needed to save money for college. So I started at a small Wall Street institutional boutique where I got my Series 7 at 22 and began building a book. I worked my way through NYU. But I was not comfortable with the volatility of equities for my customers. Eventually I left for a larger firm’s muni desk, where I underwrote and traded munis. Bonds were a better fit for me, and at the time they were pretty exciting, as rates were at their peak. I eventually moved on to become an investment adviser to HNW clients at Mani Hani. I was a fiduciary and loved it – it was like finding a home.

Over the years I’ve had the chance to build financial and media businesses, was a financial journalist and now I am an advocate for investors and the importance of the fiduciary standard for investment advice. I’m very proud of the research, education and advocacy that the non-profit Institute for the Fiduciary Standard does. My firm, FiduciaryPath, helps fiduciaries understand their fiduciary responsibilities and best practices, and when their investment processes conform to the global fiduciary standard of excellence, they can be publicly recognized by the Centre for Fiduciary Excellence.

FN: In your mind, what is the ideal Uniform Fiduciary Standard and how would this best protect the interests of investors?
McBride: I’m afraid the term “uniform” is being used to eviscerate the centuries-old meaning of fiduciary. Investment advisers providing advice to investors are fiduciaries – they act in the investor’s best interest at all times, (and, under ERISA, solely in the investor’s best interest); they act as a prudent person with the competence and diligence of an expert; they avoid conflicts of interest; they manage unavoidable conflicts in the client’s best interest and disclose them; they control investor’s costs; and, they clearly disclose all investor costs. That’s ideal.

In terms of extending that bona fide fiduciary standard to brokers (as called for in Dodd-Frank), the broker-dealer lobby group, SIFMA, has proposed to SEC a “universal fiduciary standard,” which according to SIFMA’s own blueprint is nothing more than their current lower sales or suitability standard, but masquerading as “fiduciary.” No mention of the fiduciary principles above. SIFMA says extending the fiduciary standard to brokers would limit access to advice, limit access to securities products and cost investors more. None of those assertions is true. SIFMA doesn’t want brokers to have to change their business model. The fact is that the business model SIFMA’s striving to protect is the model where clients serve the broker, not the broker serving the clients – where the broker can or must put themselves and their firms before the client. SIFMA’s main concern is for BDs to continue to sell whatever they want or have to, to an unwitting investor who believes they are getting “advice.” As for cost, what costs less, a fully disclosed fee on assets or an iceberg of hidden fees where the revealed commission is a fraction of the real costs to the investor? SIFMA lobbies against the authentic, bona fide fiduciary standard at every turn, telling regulators and Congress that if brokers had to provide advice as fiduciaries, that investors would lose access to advice. What SIFMA’s really saying is, if our brokers have to provide advice in the client’s best interest, they would refuse to provide advice at all. That sounds like a threat of blackmail to me. But if the advice is adverse to the client, perhaps no advice would be better.

SIFMA’s worried that brokers who sell the highest cost, best for the broker-or-firm junk to investors won’t be able to continue. Perhaps if that’s the model they strive to protect, it should change.

FN: The Institute for the Fiduciary Standard is a relatively new organization. What part did you play in its formation and what do you do for it now? How do you see its role in the promotion of the fiduciary standard?
McBride: I am one of seven founders of the Institute, which was formed in 2011 to provide research, education and advocacy for the fiduciary standard in investment advice. The Institute’s founders are: Knut Rostad, president, Marion Asness, Philip Chao, Maria Elena Lagomasino, Jim Patrick and Michael Zeuner. Personally, I’m very proud of the work the Institute has done to keep the authentic, bona fide fiduciary standard in front of regulators and legislators, in the media and with the many special events and policy discussions the Institute has hosted. 

FN: Together with fi360 and ThinkAdvisor, you’ve been involved with annual surveys of the industry on fiduciary matters. What are some of the trends you see coming out of those surveys? Do these trends give you a sense on how the industry might begin to promote the fiduciary standard, whether or not the SEC formally adopts one?
McBride: For the past three years, the fi360-ThinkAdvisor Fiduciary Survey has studied the attitudes of financial intermediaries about the fiduciary standard. We invite participation of all kinds of financial and investment advisors – registered investment advisers, investment adviser reps, registered reps, insurance producers and consultants, attorneys, family office leaders. We look at the data cross tabulated by type of registration and by compensation model. What’s most surprising: the majority, including brokers, say extending the fiduciary standard to brokers will not cost investors more – (many commented that advice under the fiduciary standard would cost investors less!) – nor would it deny them access to advice or choice of products (except the most egregious). The other findings that stand out are that across the board, the majority said the even more stringent ERISA fiduciary standard should apply to advice to 401k AND IRA participants, as well as money rolling over from those types of accounts. This is a real departure from what SFIMA says B-D leadership wants – there’s a real difference of attitude in the trenches than in the executive suite of brokerage firms and insurance companies.

FN: What’s your biggest fear regarding the involvement of regulators in the drafting of a new fiduciary standard and how might that impact investors.
McBride: That it will be watered down to a faux fiduciary sales standard, and then further confuse and abuse investors. You mentioned in an article last year that each month regulators delay requiring everyone who provides advice to do so under the bona fide fiduciary standard costs investors $1 billion (see “Study: SEC Fiduciary Delay Costing Retirement Investors $1 Billion per Month,” FiduciaryNews, February 12, 2014). That means since the fiduciary standard was called for in the Blueprint for financial reform in May 2009 the cost to investors is $56 billion extra. That’s staggering! For many retirement plan participants, the DOL’s embrace of many more advisors to plans and participants and on rollovers cannot happen too soon. It can mean $150,000 or more in a person’s retirement account over an investor’s career. These numbers are very meaningful and could be the difference in whether a person can retire with dignity – or not at all.

FN: You’ve had a chance to see up close what regulators are thinking. Do you believe they acknowledge the academic research that shows the cost of conflicted advice to investors? If not, why do you think they might be ignoring it?
McBride: Many of the regulators I’ve met are very conscious of that research, welcome it. Many would like to hear from more fiduciaries. I do not think they are ignoring the research. But I think the pressure SIFMA and the insurance lobbies are putting on are enormous. The money the industry is throwing at this is huge. But I have been puzzled about why brokers and the insurance industry so willingly talk about loud about throwing their customers under the bus, and yet they’re surprised about the patter of investor feet away from them.

FN: Without naming names, can you share with our readers any horror stories you’ve seen in the real world that resulted from investors or plan sponsors not using a fiduciary for investment advice?
McBride: I once saw a 401k where the company fiduciaries were so blatantly violating their fiduciary duty that they threatened to fire an employee who brought it to their attention. And there are many more just like that – 401k plans managed by the CFO’s brother-in-law or golf buddy.

FN: What do you think can or should be done to allow for broader awareness on the part of everyday investors regarding fiduciary issues?
McBride: Media coverage is a key to investors starting to understand the differences among those who advise or sell to them. Titles are a simple and effective way to differentiate sales from advice. The SEC has to stop allowing the B-D exemption to continue “incidental advice.” That was a big mistake in 2005 that they could easily correct.

FN: You’ve done so much in the fiduciary field that we’re bound to have left out something. Is there anything more you think our readers should know?
McBride: There’s a relatively simple solution to this. Eliminate the broker-dealer exemptions and the ERISA exceptions. For the many brokers who want to put clients first under the real fiduciary standard, have them obtain the training and credentials to live up to the responsibilities of the bona fide fiduciary standard. Permit only those to have titles that convey a fiduciary duty–advisor, consultant, counselor, wealth anything, etc. Those who want the status quo get the time honored sales titles. Ensure in a one page disclosure that the investor knows and affirmatively circles which relationship they want. And no dual registrant hat tricks!

FN: Thank you so very much Kate, for taking the time to share your thoughts. Your work is inspired as well as inspiring. We know FiduciaryNews.com readers really appreciate hearing from someone like you who has veteran front-line familiarity with all things fiduciary.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

8 Comments

  1. Don Devost
    Don Devost January 23, 07:22

    Excellent interview. I think Kathleen’s proposed solution in her final response makes a great deal of sense. My biggest fear, however, is that the push to get to this result will fall short against the pressure of the industry lobby and that we will end up with a watered-down fiduciary standard that serves only to sanction current brokerage practices. That would be far worse than where we are today. In general, I’m a big fan of compromise, but on this issue that could be dangerous.

  2. Mike Mahoney
    Mike Mahoney January 23, 10:13

    I am curious as to how anyone believes the Fi360 investment “fiduciary score” adds any value to the an investor. I understand the process they support and agree with that. It just seems it’s all designed as cover for malpractice for a faulty fund rating process. The rating is skewed to past performance and peer group comparisons , promoting the use of actively managed funds.

  3. Stephen Winks
    Stephen Winks January 23, 11:50

    The fiduciary business model is materially different from the brokerage business model. The challenge Kate did not address is that differentiating conflicts of interest between the two have to be eliminated to achieve fiduciary standing, disclosure or management of conflicts does not remove the conflicts. Thus, the brokerage industry must become a large scale institutionalized advisory services business model–not remotely close to todays IARs working in a brokerage format. IARs do not have control over their value proposition, cost structure, margins or professional standing. What is worse than “no advice” suggested by the SIFMA is unreliable advise rendered by brokers who are neither accountable for the recommendations nor have any ongoing fiduciary duties required by statute to protect the best interest of the investing public. This requires an in-depth understanding at the highest and most discernible level of the processes, technology, work flow and conflict management long ignored in retail fiduciary advocacy and explains why there is a mistaken belief that simplistic solutions like titles are a solution.

    The solution is creating large scale institutionalized support for fiduciary standing with the means to prove expert fiduciary standing citing statute, case law and regulatory opinion letters. The brokerage industry will not pursue this route and in doing so will self select to lose the trust and confidence of the investing public.

    SCW

  4. Larry Elford
    Larry Elford January 23, 12:17

    Thank you from Canada Kate and Chris for your work. We are on similar paths, however I suspect you folks are doing a better job than I. I am a recovering broker with an interest in matters fiduciary. I note a comment in this article that lack of fiduciary standards is costing Americans $1 billion per month. We have a university study here in Canada that puts the harm, just from mutual fund sales tricks at about half a billion EACH WEEK. When I add in the tactics known to myself I can easily come up with an amount of harm equal to that, totalling one billion every week, on average, in Canada. I submit some youtube videos that go into more detail, beginning with this one. I hope you will at least view the first 3 minutes, to get the story. I promise it is in your line of interest. Cheers and best, Larry Elford, Alberta http://www.youtube.com/watch?v=KH6XMXlfdBw&feature=share&list=UUy8dpTRZHEz-0JBa_l0w7AQ&index=2

  5. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author January 23, 14:29

    FiduciaryNews.com Fans: We don’t usually allow links in our comments, but we reviewed Larry’s YouTube video. It is an excellent educational piece. He’s not selling anything. He also includes information about both Canada and the United States when it comes to the fiduciary standard. Although it’s a little long at 18 minutes, please take the time to watch it and let us know what you think.

  6. Fiduciary Advisor Advocate
    Fiduciary Advisor Advocate January 23, 18:18

    In my view, this is very thoughtful and thank you for the article. A couple of thoughts from this end- if we take a page from the group which has been under fiduciary scrutiny for years – the larger institutional asset pools- we can glean that standards have to do with process which is documented, defendable, repeatable and based on sound underlying investment theory or practice. That Fiduciary Continuum, if you will (yes that is being trademarked) consists of all elements of the process- not just IPS, not just investment research, not just implementation, not just disclosure but the whole things. One of the practical difficulties to bringing fiduciary standards to a larger audience is that it has not been scalable and in it’s present form(s) not a terribly profitable business. In other words- the advisor and the house can make a lot more money off one account acting in a suitability rather than fiduciary capacity.

    We know the problem- so who will ante an integrated fiduciary solution which allows advisors to act in a fiduciary capacity, to Steve Winks point ‘control their value proposition’ and be able to scale their business?

  7. Joel L. Frank
    Joel L. Frank January 24, 12:08

    This interview should be required reading for every DC plan sponsor (public and private) in the nation. Keep up the fine work.

    Joel L. Frank
    Pension Columnist
    The Chief-Civil Service Leader
    277 Broadway
    NYC 10007

  8. Gene Lipitz
    Gene Lipitz February 11, 17:48

    Kate is a hero in the fight for investors and beneficiaries. Her work for clients, in the press, and in DC is truly exceptional. Thank you Kate!

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