There is a good chance you missed the article on page C7 of the Wall Street Journal on January 24, but the events discussed caused quite a stir in the financial planning world. As the article stated, the Securities and Exchange Commission has delayed implementing a key part of the Dodd-Frank Act, which required fiduciary standard for all who give investment advice, SEC-registered or not.
The current dilemma on Wall Street can be seen in Wall Street employees such as Fabrice Tourre who boasted about his ability to sell toxic securities to unsuspecting customers, or Goldman Sachs CEO Lloyd Blankfein testifying before congress that his firm had absolutely no duty to protect the interest of his customers in these toxic transactions. It is plain to see that Wall Street is not all about creating vast wealth for the customers of these companies.
The Dodd-Frank act was supposed to be the cure to all these problems. Part of this act called for all brokers to be held to fiduciary standards “at least as stringent” as the standards for investment advisors. Because of heavy lobbying pressure from Wall Street, the SEC has delayed implementing this essential part of the Dodd-Frank act.
Without this regulation, Wall Street employees can, for example, sell securities at an outrageous markup while their colleagues are confidently betting against these same securities. These profits result in large bonus pools for Wall Street employees. With this in mind, it becomes a lot easier to see why Wall Street has lobbied so hard to stall being held to this standard.
Meanwhile, the argument continues on what this part of the Dodd-Frank act should look like. Many believe that the SEC may give in to the lobbying of Wall Street and sign a watered down version of the act, simply requiring the firms to disclose the fact that they may be acting in their own self interest at times. In the near future, representatives of Merrill Lynch, Smith Barney or UBS may still be able to hold the title fiduciary while only adding a small note on page 27 of their potential self interest.
Registered Investment Advisors (RIA), like Timothy Financial, have been living under a fiduciary standard, the one referenced in Dodd-Frank in 1940. Although many of the employees at these registered firms still make a good living, they have a much easier time honestly explaining their investment recommendations.