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Exclusive Interview: Skip Schweiss Calls Disclosure “Terrible,” Says It Would “Confuse” Investors

December 16
00:04 2014

Skip Schweiss’ compelling stature immediately strikes you when you meet him, and his genuine sincerity makes you take to him instantly. You may recognize him as Managing Director of Advisor Advocacy & Industry Affairs for TD Ameritrade Schweiss_photo_2011_300Institutional. He’s also president of TD Ameritrade Trust Company (TDATC), which offers retirement plan solutions and services for independent registered investment advisors and third-party administrators using TD Ameritrade’s trust platform. Prior to this appointment, Schweiss held a variety of management positions within Fiserv Investment Support Services, including serving as Executive Vice President of Fiserv Trust Company, which was acquired by TD Ameritrade Holding Corporation in February, 2008.

Schweiss holds a B.S. in business administration from the University of South Dakota and a M.S. in finance from the University of Colorado. He has completed the Securities Industry Institute sponsored by the Securities Industry and Financial Markets Association (SIFMA) at the Wharton School of Business. Schweiss is a member of the Financial Planning Association, and serves on the board of NAPFA’s Consumer Education Foundation.

Today, he’s considered a prominent spokesman for fiduciary advocacy. He recently chaired a summit of fiduciary thought leaders held in Washington DC. FiduciaryNews.com is pleased to present this exclusive interview with Skip Schweiss.

FN: Tell us about your background and how it brought you to where you are today.
Schweiss: I was born and raised in South Dakota, where I went to college and met a girl and followed her to Colorado for, in my mind, a couple of years… which turned out to be 30. My first job out of college was on the floor of a family-owned retail sporting goods chain. Fun work, but since my last name didn’t match that of the family, I knew my upside was limited so I eventually moved on. Someone talked me into selling insurance and investments. I hated the selling, and the insurance, but I like the investment side of things, so I went looking for a job in financial services where I didn’t have to depend upon my sales skills for my next meal. I landed at a trust company owned by Fiserv (NASDAQ: FISV), where I had 20 good years. Most of my time there was spent in its advisor custody unit, where I learned to love the fiduciary advice model and its practitioners. In the latter years of my tenure there, I also took on our retirement plan custody business, and found a growing passion for that business and playing a role in helping American workers build a dignified retirement for themselves. In 2008 TD Ameritrade acquired Fiserv’s trust company. Tom Bradley asked me to join the firm to run the retirement plan servicing business, and I couldn’t be happier.

FN: What initially sparked your interest in promoting the fiduciary standard?
Schweiss: I have spent the last 25 years of my career serving the needs of fiduciary investment advisers, and I long ago became convinced it’s the best, least-conflicted advice model for consumers. A couple of years after I joined TD Ameritrade, Tom Bradley asked me to take on the role of advocating for fiduciary investment advisers, just before Dodd-Frank was passed into law. When Congress or regulators propose new rules, they are often in the hundreds or even thousands of pages. Advisors are running businesses, and have lives, and don’t have time to read nor digest all of that. So we do that for them and present summaries to advisors in a variety of formats including conference presentations, webinars, blogs, and Tweets. Advisors seem to appreciate this service.  I love listening to their reactions, how they feel about various proposals and trends, and taking those views to policy makers in Washington to make sure the voice of the fiduciary advisor is heard among all the other voices clamoring for attention in that place.

FN: When do you feel the push towards emphasizing fiduciary duty within the industry first occurred and why did the interest accelerate like it has?
Schweiss: This issue has an interesting history, and brevity will be difficult in answering this question! When the fiduciary advice model began to emerge in the 1980s and 1990s, and began taking clients from traditional full-service brokers, it got the attention of those brokers, and pointed out the conflict in the commission compensation model. In the early 1990s the SEC commissioned a group to study industry compensation practices. The commission was chaired by Daniel Tully, then CEO of Merrill Lynch. Though perhaps this didn’t exactly lend itself to impartial examination, the “Tully Commission” did a reasonable job of pointing out the flaws in that compensation model. The SEC thought that it would be good to allow brokers to offer fee accounts to mitigate this conflict, and proposed its “Merrill Lynch Rule” in 1999 allowing this practice. This despite the fact that the Investment Advisers Act of 1940 said that brokers need not register as RIAs as long as they didn’t charge any “special compensation,” i.e. fees, for providing advice. Further, the SEC created a safe harbor allowing brokers to offer such fee accounts while the proposed rule was working its way through the process. And these processes take some time, as evidenced by the fact that the rule was not finalized until 2005. And I’m proud to point out that my firm positioned itself alongside fiduciary advisers in opposition to this rule, in contrast to some of our peers. The Financial Planning Association brought suit against the rule, and prevailed in 2007. This forced brokers to dismantle these fee accounts, and/or move them under their corporate RIA entities. Enter Dodd-Frank in 2010, which again sought a solution. Chris Dodd told me personally that he felt brokers should be held to a fiduciary standard and included that in an early draft of the bill. He said he was quite surprised at the resistance to that, and relented. Instead, the final bill just mandated an SEC study on that question. The SEC staff completed its study in January 2011, recommending that brokers be held to a fiduciary standard. We’ve seen no tangible progress in the ensuing four years.

FN: When did the effort to adopt a universal fiduciary standard peak and what has gone right and wrong since then? To what extent do you blame the political ineptitude of the early days for the failure to see anything completed by now?
Schweiss: Given this long and winding history, it’s difficult for me to pinpoint a “peak”, and I think we’re going to be at this for a while yet. And I wouldn’t refer to it as “political ineptitude” so much as the strong lobbies against forcing brokers to live under the ’40 Act when providing advice, even though that law is pretty clear on that point. The SEC has allowed brokers to provide advice as a primary function, without registering under the ’40 Act, in seeming contravention of that law.

FN: Who opposes the fiduciary standard and what have they done to be successful in causing regulators to delay implementation?
Schweiss: The insurance advice industry is fundamentally opposed to anything that looks like a fiduciary standard. Since 2009, securities brokers have said that they want to live under a fiduciary standard, but are strongly opposed to living under the ’40 Act that RIAs live under. They seem to be looking for some kind of disclosure-based avenue to being considered fiduciaries. We think that would be terrible for investors, and not at all good for real fiduciary advisors either. Clearly the brokers and insurance lobbies have been quite successful in delaying action on this. They spend many multiples of lobbying dollars beyond what is spent by the fiduciary advice proponents. Need I say more?

FN: Despite the backing of consumer groups, among private investors, there’s been very little in the way of grass roots support for a fiduciary standard. Why do you think this is so?
Schweiss: I really don’t think retail investors understand this stuff. Studies show they hate the brokerage industry, but they love their broker. (It’s a very similar dynamic to Congress, where they hate the entity but love their representative.) Investors want to feel they are being taken care of and getting good financial advice, but it’s beyond their bandwidth to care about these distinctions between “suitable” advice vs. “fiduciary” advice and how those distinctions can lead to impairment of optimal financial advice and outcomes. And by the way, the term “fiduciary” is not well received by investors in surveys.

FN: The DOL has renamed its effort. It no longer refers to it as the “Fiduciary Rule,” but as the “Conflict of Interest Rule.” Why do you think this is so and will this make it easier for the DOL to implement its plan?
Schweiss: I’m not sure why they changed the name, other than maybe to remove that dreaded “F” word that seems to generate so much heat. The DOL clearly has an uphill battle on this. Most in Congress seem opposed, and while the administration has periodically expressed support for its agency in this effort, it hasn’t been a top priority for the president. Brokers and insurance companies are afraid that a future rule could deny them commission income when providing advice to IRA accounts, and that seems to be at the heart of the opposition. The DOL says it will re-propose the rule in early 2015, but that doesn’t give it much time to get something finalized before the 2016 presidential election cycle heats up. So while I’ll refrain from making a firm prediction, I’m not too optimistic on something getting done here.

FN: What’s your biggest fear about what the DOL or the SEC might do regarding the adoption of a universal fiduciary standard? Which agency do you feel is more likely to do a better job at implementing the fiduciary standard?
Schweiss: We should remember these are two different regulatory regimes, based upon two different laws: The DOL regulates the retirement plan industry under ERISA (1974), while the SEC regulates investment advisers under the ’40 Act. The standards are defined differently, have different case law, and mandate different levels of care. ERISA’s fiduciary standard is higher than that of the ’40 Act: ERISA mandates a “sole interest” of the client standard, while the ’40 Act mandates a “best interest” standard. My biggest fear in all this is that the SEC could propose and finalize a rule that allows brokers to be considered fiduciaries via a disclosure mechanism. This would further confuse investors, and make existing problems worse, not better. The DOL has, in my view, done a better job of overseeing its fiduciary standard than has the SEC. Part of the reason for that lies in their missions: the DOL is tasked with protecting retirement investors, period; the SEC is tasked with a three-part mission of facilitating capital formation, ensuring fair and efficient markets, and protecting investors. Those three things can sometimes come into conflict, and cause openings for industry voices to intercede and have influence on different fronts. While each of these is a valid purpose, the three of them together in the SEC’s mission statement makes its life more challenging, I believe. I’ll add that Dodd-Frank gave the SEC 100 rules to write, none of which is a uniform fiduciary standard for brokers and advisers. That is a herculean task by itself, and doesn’t leave much bandwidth for discretionary rulemaking.

FN: In your mind, what would be the best possible implementation of the fiduciary standard?
Schweiss: If brokers want to be considered as fiduciaries, they should register under the ’40 Act. No regulatory nor legislative action required.

FN: If you had the ability to go back in time, what would you like to have seen been done differently in promoting the fiduciary standard?
Schweiss: We’ve been banging the table for a long time that brokers should be held to a fiduciary standard. My thinking has evolved to a place where I’m not sure that’s such a good strategy any more. It hasn’t gotten us anywhere, and is more likely to lead to a disclosure-based fiduciary standard than anything like the ’40 Act. So while none of us can change the past, we can learn from it, and I think the fiduciary advice industry should be thinking about a new strategy. And we should think about it in terms of where we have the most control: ourselves, rather than with Washington. Perhaps this means a new set of standards governing how we care for our clients and how we demonstrate and communicate that distinction. The Committee for the Fiduciary Standard has designed an excellent approach that has been in use for years now. And there are a number of efforts under way right now, fairly quietly at the moment, to move that ball forward.

FN: How do you see the movement towards a fiduciary standard playing out? Will it ultimately be decided by regulators or by the market?
Schweiss: It’s hard for me at this point to see the regulators “solving” this problem.  It’s probably time for the market to solve it. Ultimately this needs to be about how to best care for investors, not about the various business models or labels. Both brokers and advisers have a legitimate role to play in serving investors, and we just need to do a better job ensuring that investors know what they’re getting in return for their hard-earned money.

FN: What other comments do you have on this topic that you’d like our readers to know?
Schweiss: Two things: First, I’d like to see the media do a better job drawing distinctions between brokers and investment advisers, rather than referring to them all under the “financial advisors” label. It further confuses consumers, which doesn’t help. Second, I recently was at a conference where Sallie Krawcheck, former CEO of Merrill Lynch, spoke. She is an incredibly bright, articulate, and candid executive. Among many interesting things she had to say, she expressed that she never understood why RIAs were so insistent on brokers being held to a fiduciary standard (in fact, she used the word “stupid” to describe that position). “Why give up your competitive advantage?” she asked. Quite an interesting observation from a former wirehouse top executive. She went on to emphasize that investors don’t care about our intra-industry squabbles, and that we need to focus on what’s best for them. Amen.

FN: Skip, it’s always a pleasure to hear from you. We’re sure our readers feel the same way, too. Thanks for taking the time to let us in on your thoughts and insights. May you find the New Year bringing you great tidings of fiduciary joy.

Interested in learning more about important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His forthcoming book Hey! What’s My Number? – The One Thing Every Retirement Investor Wants and Needs to Know! Will be available later this year.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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5 Comments

  1. Don Devost
    Don Devost December 17, 07:23

    His position is spot on. A uniform fiduciary standard would be watered down; bad for investors and really bad for RIAs. A disclosure rule would be a joke. Investors don’t understand 90% of what’s put in front of them already, especially when it comes to complex insurance products. The situation is already so bad it’s hard to imagine it getting worse but industry lobbyists and a feckless congress are pretty adept at squeezing under even the lowest bar.

  2. John Blossom
    John Blossom December 17, 08:56

    Right on, Skip! Courageous and candid remarks by a great spokesman for what seems the right way to view this issue. I wish that leaders of all providers that serve the investment advisory driven retirement market believed the same things that Skip does. Sadly, I don’t think that is the case.

  3. Barbara Roper
    Barbara Roper December 17, 09:40

    Great interview, as always. I think Sallie Krawcheck, as quoted by Skip, misses an important point. Advisers only started advocating for brokers to be held to a fiduciary standard when it became clear that the SEC wasn’t going to do anything to stop brokers from marketing themselves as advisers. Since investors do not, and cannot, distinguish between the two, it is hardly “stupid” for advisers to try to level the playing field. Ultimately, I am more optimistic than Skip that there is still a chance of a positive regulatory outcome, but I couldn’t agree more that a standard that is solely disclosure-based would be worse than no action at all.

  4. Dennis Myhre
    Dennis Myhre December 17, 18:56

    Chris,

    Prior to reading this interview, I was reviewing Notes to Financials in an annual report published by a well known Income Builder Fund. The last note addresses disclosure requirements by the FASB Accounting Standards, including the use of Derivatives and Off-Balance Sheet accounting practices. The note concluded with “the Fund’s risk of loss may exceed the amounts recognized on the Statement of Assets and Liabilities.” In my opinion,this statement implies an admission of the use of Off-Balance Sheet Accounting practices, which immediately turned me off this investment.

    In my opinion, using disclosures is simply another acceptable way to mislead the investor and not be held accountable. Disclosures do not work. Stronger enforcement of ERISA and SEC violations will work assuming an effective government agency, which is yet to be proven. Mr. Schweiss and I share the same alma mater, as I also have a BS degree in Business Admin at USD (1966).

    Dennis Myhre AIC

  5. Stephen Winks
    Stephen Winks December 18, 19:46

    Skip is a powerful voice of reason, precisely what the industry needs in bringing advisory services and fiduciary duty into the mainstream as a separate and distinct value proposition than retail brokerage–as Sallie Krawcheck suggests.

    SCW

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