Morgan Stanley’s wealth management can be described as nothing other than an unmitigated success in the fourth quarter. The numbers are in, and the data show that the unit is minting cash as the broker enjoys the transition from commission-based to fee-based accounts as provided by the fiduciary rule. Revenue increased a whopping 10% and the profit margin rose from under 10% the previous year to an eye-watering 26% in 2017.
FINSUM: We realize the importance of fiduciary duty, but how is a transition to much more expensive fee-based accounts—which are hugely boosting net profits to big firms—in the ultimate best interest of clients?
On Wall Street has run what we consider to be a very bad article, but we thought our readers might enjoy, or cringe, in hearing about. In an article entitled “Why Financial Planners Should Support a Strong Fiduciary Rule”, the director of consumer protection for the Consumer Federation of America manages to make almost no discernible argument. Attacking those who oppose the fiduciary rule, the article fails to make any salient points in support of the current DOL version of the rule. In fact, the most interesting part of the article is actually an inadvertent support of those who oppose the DOL rule. The author acknowledges that commissions-based payments are no more inherently conflicted than fee-based accounts.
FINSUM: This article was incredibly mind-numbing. While we have been in consistent opposition to the DOL rule, we are not against fiduciary duty in principal, and have been trying to find arguments in its favor. In this piece we kept reading and reading waiting for a good point to be made, but it never arrived.
There is some good news bubbling on the recently-quiet fiduciary rule front. Rumor has it that the SEC is working on its own new fiduciary rule and will have it done before the current DOL rule is due to be implemented in mid-2019. At least that is the opinion of SIFMA, whose CEO made public comments in a press conference in New York yesterday.
FINSUM: We favor this idea, but do have doubts about just how committed the SEC really is. When Clayton first started, the SEC was very eager about developing a new rule. However, throughout the second half of this year there seems to have been a slow fading of interest and commitment. Only time will tell.
On the surface it seems kind of counterintuitive, until you realize the logic that is. There is a new trend in RIAs—they are forming their own B-Ds. Many firms don’t know exactly how to handle their due diligence with outside B-Ds in the new regulatory era, and as such, are forming their own B-D entities. Firms that have their own B-Ds can offer a wider range of brokerage, and most feel that to be truly independent, they need their own B-D.
FINSUM: It makes sense to have a B-D arm for wider product offerings and to handle new and legacy businesses that can’t really be facilitated in the RIA structure.
There has been a lot of hope lately about the likelihood for the SEC to take control over the fiduciary rule and craft a comprehensive new regulation. However, the odds of the SEC doing so look increasingly long. The agency itself has made several distancing comments lately, such as SEC chief Jay Clayton admitting there was “no silver bullet” for a new rule. Not only does the SEC have the big challenge of harmonizing a fiduciary rule across all types of accounts, but it is facing a fierce and divisive political climate. Many states are already crafting their own fiduciary rules, another factor the SEC must overcome as it needs to appease all the states. There is also internal division within the SEC, as some commissioners are against the crafting of a new fiduciary rule, while others are for it.
FINSUM: On top of all these headwinds, there is also the constant barrage of lawsuits which will try to stop the SEC at every turn. We think it will take several years for the SEC to make a rule, if it ever even gets there. That means we will either need to live with the DOL fiduciary rule, or it will be tossed out once and for all.