By Suzanne Barlyn
Feb 8 (Reuters) - Tamar Frankel knows it will be hard to
shrink a sales-driven culture amongst securities brokers - an
ethos that can force investors to become financial experts to
safeguard their interests.
But the Boston-based legal scholar says imposing higher
ethical standards on securities brokers can still be achieved,
in part, by spelling out a few critical facts to their
customers. Among them, a simple disclosure that includes an
explanation of how much a broker earns for selling certain
Frankel is well-positioned to opine. A professor at Boston
University Law School since 1968, Frankel has written
extensively on fiduciary law - a requirement that certain
financial advisers and other types of professionals act in their
clients' best interests. While the concept sounds simple,
applying it on Wall Street has led to a long tussle between the
securities industry, regulators and investor advocates.
At issue is a controversy about the differences in
responsibilities securities brokers, who register with the
Financial Industry Regulatory Authority (FINRA), have to their
clients compared to those of registered investment advisers
(RIAs), another type of financial adviser overseen by the U.S.
Securities and Exchange Commission.
While RIAs must act as fiduciaries, putting the best
interests of clients first at all times, brokers now need only
recommend securities that are "suitable" for clients, based on
factors such as risk tolerance and age.
But suitable can often mean selling investors products that
are more costly than similar securities, according to Frankel,
and keeping them in the dark about other available options.
The securities industry says it supports a fiduciary
standard but wants a version that will accommodate certain
business practices. That includes selling securities branded
with the brokerage name, which brokerages promote, even when
cheaper alternatives are available.
Frankel recently spoke to Reuters about her concerns. Edited
Q: Can you really apply a fiduciary standard to Wall Street?
A: I think so. It will help to show who is a real salesman
and who is a person who sells something but also has advice.
Brokerage customers are not always in the position to make that
distinction. For example, when I buy a dress and the saleswoman
tells me that I look beautiful, I can judge for myself if that's
true because I can look in a mirror and see I'm fat. But if a
doctor or lawyer says the best thing for you is to have heart
surgery or go to court, I have no idea about whether that advice
is for my benefit.
Q: Is selling securities different than selling products or
services in other industries?
A: Yes. That is because financial assets are not assets.
They are promises (of growth and return) for the future. There
is a much weaker ability to test them. We can't physically see
assets. It's not like a car that I can get in and drive - and it
either drives or does not. I rely on a car salesperson less than
I rely on someone who sells me promises for the future because I
can test the car myself.
Q: How is a suitability standard different than a fiduciary
A: Suitability is tremendously broad - and right now, the
standard does not include some important elements (including)
explaining how much the "suitability" of an investment costs the
buyer, and whether the buyer has an opportunity to a better or
the same suitable security for less. That's where the joker lies
because that amount is collected by the sales person. So the
recommendation may be suitable, but for a much larger amount.
Q: How would you fix this?
A: The first thing is to tell the buyer everything that is
relevant about the salesperson and their recommendations. But
giving the buyer every detail doesn't work. It's inefficient
because it's complicated. You can't require everyone to become
an expert in finance just as you can't expect everyone to become
an expert in medicine.
Q: Can the securities industry give buyers the information
they need without overwhelming them?
A: Yes. I would give clients a document with my name and
photo. It would also include answers to about eight questions,
including where I work, that I passed exams, my education, and
whether I've had problems in the industry. Then comes the
clincher: as a client, I would want to know whether the broker
gets money for selling securities to me, how much, and who pays
him. For example, an insurance company pays a lot more for
someone to sell a variable annuity than the government pays to
sell government securities.
Q: Is simplified disclosure, by itself, enough to protect
investors and consumers in general?
A: We have to start with culture. The more people behave in
a certain way, the more others are going to behave in a certain
way. Leadership can bring that about in a way that is larger
than any one particular person who can affect family and
friends. If we want to change, we also have to reduce the size
of the financial system, which is double what it once used to
be. That is unhealthy because, as a society, we should produce
and not merely move promises from one person to another.
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