The Derivative Project

The SEC Study on “Fiduciary” is not only conflicted, but Harmful to Retirement Investors, our Youth and our Economy’s Future

The SEC Study on “Fiduciary” is not only conflicted, but Harmful to Retirement Investors, our Youth and our Economy’s Future

Here is the Most Critical, Bi-Partisan Issue that the SEC Failed to Address in Their Study on Brokers and Investment Advisors and the Fiduciary Standard
There is a crucial, bi-partisan issue, completely lacking from the just-released SEC study on who is a fiduciary for investment advice.   We can no longer afford wasteful regulatory bodies that are not acting in the public good.  The hour is late.  Here is a link to an Op-Ed in this morning’s Wall Street Journal, Generation ‘Y Me?
To quote the writer, Michael Casey, in this Op-Ed,  “Demographic changes here and abroad mean young Americans face a bleaker investment future than their parents did.  Improving the U.S. investment climate will ease America’s short-run economic challenges and make us more globally competitive over the long run.”
The SEC study completely misses that point, made by Mr. Casey, a consultant to private equity, hedge fund and corporate investors in emerging markets. How can we as a nation restore the integrity of our investment markets to ensure capital is flowing to the most effective investments within the United States, to attract investment from outside the United States?
To continue to allow the self-serving securities industry to control the flow of trillions of dollars of American’s retirement savings into fee-laden inappropriate investments is limiting the future of our youth, causing damage to our international reputation and hindering our economic recovery.
Congress gave the SEC the mandate to define in this Study mandated by Dodd-Frank:
  • Duty of Care – “Minimum baseline professionalism standards could include, for example, specifying what basis a broker-dealer or investment adviser should have in making a recommendation to an investor.”
  • Personalized Investment Advice About Securities:  The Commission should engage in rulemaking and/or interpretive guidance to explain what it means to provide “personalized investment advice.”
The SEC avoided both these issues.  The SEC is aware that absolutely nothing has changed in the past forty years for the baseline of professionalism for a broker or a registered investment advisor.  Yet, there have been dramatic shifts in the capital markets environment, including:
  • Investors are now responsible for investing their retirement savings.  Previously, there were defined benefit plans and the retail retirement market is trillions of dollars, substantial, warranting a base level of professionalism to protect our economy overall.
  • With the advent of floating exchange rates, over-the-counter derivative markets developed.  Derivatives are now also used regularly as speculative tools in mutual funds, without adequate disclosure to investors.  The over-the-counter markets have dramatic day-to-day impact on all capital markets.  
What is a Base Level of Professionalism?
To ensure a fiduciary delivers competent investment advice there is an implicit, unspoken understanding of a base level of professionalism.  This was a core competency that had to be part of the SEC study on who is a fiduciary for retail investment advice.  The SEC ignored this most critical imperative given to them by Congress, “what constitutes the professionalism for a investment advisor fiduciary?”
The Derivative Project is very familiar with the current CFA curriculum, with the Series 7 curriculum and the Series 4, Registered Options Prinicipal.  The training for a fiduciary investment advisor must be totally revamped to meet the current investment and capital markets environment.
Perhaps if investment advisors had been required to have a base-line knowledge in derivatives, the financial crisis could have been avoided.  The level of education, training and certification standards must be addressed and outlined for every retirement investor, so they can understand what role their investment fiduciary will play in the advice offered to them. 
The SEC is simply justifying the status quo, which is solely to the benefit of the securities industry and to the detriment of the retail retirement investor and a swift economic recovery.  Most obviously, the gross profit margins for securities firms are far greater if they are able to hire entry- level brokers, with no education, experience and training to advise their retail retirement clients.
It is time that Congress require real fiduciaries, that are trained in capital markets, that can weigh the cost benefit of which investment is in the public good, that know how to read a balance sheet that is employing derivatives and that will advance the future of the retirement saver and the health of the U.S. economy overall. 
Cramming in a weeklong course to pass an easy, inadequate Series 7 and Series 65 exam is no longer acceptable for the U.S. retail investor or for the government of Greece.
What was Absent From This SEC Study?
The discussion that was completely lacking from the SEC study is what is the professionalism required for an investment advisor fiduciary in today’s economic and capital markets environment?
The study was not neutral. The securities industry lobby and their wish to retain the status quo drove this SEC study. The status quo will no longer suffice.  The retail retirement investor will not accept this lack of professionalism for an investment advisor fiduciary.
The investing public requires fiduciaries that can act in their best interest and that of our economy overall, whether or not one is advising the government of Greece or Milan, Italy on use of derivatives or the small retirement investor choice in a ETF or mutual fund.  A fiduciary requires a certain number of years experience, a certain education, a defined curriculum and an agreed upon code of ethics, no different than the role of a doctor, a lawyer or an accountant.
Our economy is struggling.  Unemployment is high.  Investors, whether it is pension funds, hedge funds, private equity firms or a small retail retirement investor, all have the same goal, a strong, vibrant American economy.  How do you rebuild our economy?  Involve all these players in the most cost-effective strategies for growth and the effective mobilization of capital to the best investments.
Why is the SEC recommending that a retail retirement investor pay a fee to a broker for advice on where to invest his hard earned retirement dollars, when a broker has no extensive training in capital markets, no experience in economics and no training in the effective allocation of scarce resources, and no experience in derivatives? Is this what the U.S. government wants to continue to base the renewal of our economy on?
To quote the SEC study released late yesterday:
“Therefore, in light of this confusion and lack of understanding, it is important that retail investors be protected uniformly when receiving personalized investment advice or recommendations about securities regardless of whether they choose to work with an investment adviser or a broker-dealer. It also is important that the personalized securities advice to retail investors be given in their best interests, without regard to the financial or other inter
est of the financial professional, in accordance with a fiduciary standard. Under a uniform fiduciary standard, retail investors can be made more confident in the integrity of the advice they receive as they invest for their own and their families’ critical financial goals. At the same time, it is necessary to ensure that any uniform standard allows and ensures retail investors to continue to have access to the various fee structures, account options, and types of advice that investment advisers and broker-dealers provide.”
In other words, the SEC was lobbied by the securities industry who wants to continue the status quo, with confusing fee structures, account options and “types of advice”, no base level of professionalism, so the retail retirement investor can continue to be overwhelmed by confusing, conflicting ineffective products designed to garner maximum fees at the small retail investor’s expense and to the detriment of our economy overall.
The question Congress must address is simple:  “Is it in the best interest of the retail investor to have brokers with no education, no minimum level of training, no professional certification advising those seeking personalized investment advice”?  Is this in the best interest of our economy? Who will ensure that retail retirement dollars are placed in the most effective investments to rebuild our struggling economy?  These are basic questions that the SEC failed to address, that cannot be ignored in any definition of a fiduciary providing investment advice in the 21st Century.

What the SEC has not told Congress in this study:
  • The securities industry is solely responsible for creating the false advertising that has created the confusion in the investors’ minds, causing trillions of dollars of retirement account losses in the most recent financial crisis.
  • The securities industry has created an industry that purports to offer investors “trusted advisors” and financial planners that meet individual needs.  This is false advertising.  Any type of salesmen can take an easy test, with no education, no training and no standards and advise Americans how to plan for their future.
  • The SEC allows broker-dealers to offer confusing, conflicted investment advice products, that continue despite calls by investors that these products are in material conflict of the Investment Advisors Act of 1940.  There is no discussion in this study that there will be an end to these conflicted investment advice products, such as the Schwab Private Client Service, that pays brokers more if they keep their clients in the stock market in lieu of a proper allocation of bonds and/or cash.
The U.S. economy can no longer afford this incestuous relationship between the SEC, FINRA and the securities industry.  The regulatory costs are too great.  The opportunity costs to our economy are too great. The retail retirement investor deserves access to a properly trained professional, if they are to pay a fee for investment advice.
Why Didn’t The SEC Advise Congress On Meetings With True Investor Advocates, thus slanting the Study?
On Page B-1 of this Study on Investment Advisors and Brokers report, the SEC details whom they met with. 
The SEC’s study should be thrown out, for not including information given to them from investor advocates and for lack of disclosure of meeting with Investor Advocates asking for more training/experience for SEC registered investment fiduciaries. For example, SEC Commissioners met with The Derivative Project on December 3, 2010 at their offices in Washington D. C. and they did not release the Agenda for this meeting, as required to do so by law, nor did they release the written materials from this meeting as required on the SEC website.
The Derivative Project Provided SEC Commissioners Detailed Training and Education Requirements for any SEC Registered Investment Advisor and Met with the Commissioners on this Topic
Here is a brief outline of change for the average retirement investor, as a result of this conflicted SEC study. 
Congress must define the fiduciary rules, as the SEC is too conflicted to do so.  Thousands of dollars in regulatory fees can be saved through simple, straightforward fiduciary rules and common sense investor education.  
Retirement investors will cease from doing business with broker- dealers, if there is a need for “investment advice.”
Broker dealers have no legitimate training in providing investment advice.  Broker dealers are “snake oil salesmen”,  regulated by a self-serving regulator, FINRA; that is, the member securities firms set the rules, and decide how to enforce the rules, in their best interest, not in the best interest of the retail investor. 
  • Retirement investors should only seek advice from a CFA, chartered financial analyst, whose standards are now defined by Congress, not the SEC.
  • If one decides to get “cheap” advice from a broker-dealer, they will be educated that they “get what you pay for, even if they are subject to the “fiduciary” standard of the Investment Advisors Act of 1940.”  You will get partial, uninformed, worthless investment advice.
Online brokers, to execute trades, when an investor does not seek investment advice can continue.
Invest in ETF’s to save high mutual fund fees and potential derivative products, embedded in the mutual funds, or structured notes, random securitized products, that may cause unusually large losses:  
  • If you cannot afford to pay for quality advice, to a CFA, insist your employer provide you access to exchange traded funds, ETF.s.  Ask your employer to have a CFA designed asset allocation ETF portfolio, available, as a cost-effective option for you.
  • Employers and the Department of Labor can consult with hedge funds and private equity firms, who can design on a pro-bono and quarterly basis, ETF asset allocations, for those unable to afford investment advice.
Retirement investors should only seek investment advice from trained fiduciaries, CFA’s, with professional and ethical  standards mandated by Congre
ss.

Retirement investors should only invest in what they know and understand, because the SEC and securities industry will offer no protection, if they are harmed. 
  • There is no right of private action if a registered investment advisor breaches their fiduciary duty.
  • Therefore, for any enforcement action, when you incur losses, compensation will be at the whim of the SEC, who tends to always side with industry, as evidenced in the Madoff case.  Certain Commissioners and the Chair of the SEC have FINRA as their previous employer, so the conflicts and the allegiance to the securities industry are obvious.  
In sum, it is a sorry state of affairs for the individual retirement investor, even after the securities industry failed to use proper hedging tools that resulted in the loss of over $2 trillion dollars in retirement assets, completely avoidable. The best one can do is to study, read up and invest only in ETF’s for a minimal exposure to equity markets, when there is a need to keep pace with inflation.
Don’t Be Fooled by Worthless Designations
  • The only designation one should accept is the CFA if one seeks investment advice.
  • The CFP designation is worthless.  To earn a CFP,  all one has to do is pass one easy course on investments and have no investment experience.  Don’t go to a CFP.
  • Don’t trust the term “trusted investment advisor.”  It does not mean anything.
Don’t Trust the Term “Financial Planner”, educate yourself. You do Not Need a Financial Planner and there is no regulation of this rogue industry, just created to garner fee income, with the advent of the elimination of defined benefit plans.
  • Again, there is no training or education required to be a financial planner.  Therefore, you know what you need to do, it is quite straight-forward:
  1. Save a certain amount of every paycheck, for retirement and emergencies or college education.
  2. Pay a fee to a CFA, registered investment advisor, if you need advice on how to best allocate your retirement investments.
  3. Have a mortgage for a house that you can afford.
  4. Do not have any other debt.  Pay off any credit card debt every month.
  5. Have 20-year term insurance to pay off your mortgage in the event of premature death and to provide an income for your spouse and children, if your spouse is not working.
  6. Pay a fee to a reputable estate attorney to prepare a will and estate plan.
  7. Pay a fee to an accountant if you need tax advice.
That is all you have to do. The “financial planning” industry is nothing more than a securities and insurance industry scam to obtain more of your heard earned dollars.  Hire the educated, licensed and trained professionals who will give you sound advice. 
 Do not squander your hard earned savings on untrained “snake oil salesmen” purporting to know something about financial planning.  If you need advice go directly to the source, a CFA, a CPA or an attorney.  Don’t waste money on an intermediary.  Go to a Professional, who is required to uphold a code of ethics.  Once again, by training and educating yourself, you will save the U.S. taxpayer thousands of dollars of regulatory costs resulting from financial planner fraud and ponzi schemes.
The Derivative Project urges Congress to:
  • Investigate the ongoing conflicts of interest between the securities industry and the SEC and FINRA. Ensure there are the necessary changes to prevent this continuing, as it is impeding the rebuilding of our economy.
  • Determine the qualifications for an investment advisor professional, including specifications on:
  1. Required educational curriculum
  2. Mandatory years of experience to become a fiduciary investment advisor to a IRA or to act as an ERISA fiduciary
  3. Code of Ethics for every Investment Advisor
  4. Certification:  CFA and changes to CFA curriculum as a result of the 2008 financial crash, including training in use of derivatives by mutual funds, proper mutual fund disclosures of derivatives, balance sheet analysis on firms using derivatives and investment strategies during a financial crisis.
  • Eliminate all confusing certifications, except CFA, while requiring greater training on derivatives for CFA.
  • Consider a private right of action for retail retirement investors who have been harmed by material conflicts and breaches of fiduciary duty in the Investment Advisors Act of 1940
The SEC has shown they are conflicted.  This Study clearly demonstrates that the SEC’s allegiance is to the securities industry, not the retail retirement investor or the good of the U.S, economy overall.  The Derivative Project looks forward to working with Congress to institute the changes required to get our economy back on track and restore our image as investment advisors who are properly trained as investment fiduciaries, not only for our retail retirement investors, but for the governments of Milan, Italy and Greece.