Monday, July 13, 2009

A Blast From the Past

About 4 and 1/2 years ago, the Securities and Exchange Commission put out a request for comments on whether to allow broker/dealers an exemption from being registered as a registered investment adviser. Back then, the SEC ruled that broker/dealers were exempt. This has obviously turned out to be a huge mistake as the events of the last year will attest. I thought it would be interesting for my readers to go back and see my position as I wrote it. Seems like I knew what was in store for the future. My response from February 3, 2005 is in blue type. I will add some final comments at the end of this blog article.

Subject: File No. S7-25-99
From: Richard A Johnson,
Affiliation: Rick Johnson Family Office,

February 3, 2005

Although there are many issues to discuss with this proposed rule, I shall limit my comments to a few key points.

1 The use of titles by broker/dealer registered representatives: Financial Advisor, Financial Consultant, Investment Consultant and other similar terms are a major source of confusion for investors. I believe that any individual holding themselves out as a financial planner, financial consultant, financial advisor, investment consultant or other similar term should have to register under the Advisors Act of 1940. This is regardless of whether or not they have discretion over an account or not.

Further, registered representatives of broker/dealers should only be able to use terms that include the word representative in its description. For example, financial representative, or investment representative. In addition, senior broker/dealer representatives could have a title similar to these senior financial representative, senior investment representative, or financial representative II. The point is that registered representatives should have at least the word representative on their business card, if they want to rely on the exemption for registration under the Advisors Act. Those who desire to put financial planner, financial advisor, financial consultant or similar term should have to register under the Advisors Act.

2 The commission is mistaken if it believes that fee based investment advice is one of the best ways of delivering value to an investor. I see a scenario where broker/dealers will be given a green light to put every client that they can into a fee based brokerage account. This truly benefits the broker/dealer in stabilizing their revenue stream. But what about the client? Is the Commission naive enough to believe that broker/dealer clients who were neglected in the past because they had already been sold B shares, CDSC annuities and the like will suddenly be taken better care of by being in a fee based account? Specifically, I am referring to a clients second and third year of being in a fee based account. If a client has given the broker/dealer all their money, then how much attention do you truly believe they will be getting in years two, three and beyond? If history lends us a clue, we only have to look at how these same clients were treated when they had already been sold every possible commissionable investment. They were put aside for new clients of the firm. The same thing will happen if you allow a green light to the broker/dealers to sell fee based accounts without being registered as investment advisors.

Financial Planners/Registered Investment Advisors have a fiduciary responsibility to not only give the initial advice, but also to continuously give advice. Broker/Dealer representatives would not have the same standard.

3 Further, what value does the client receive from a broker/dealer sold fee based account when the client is not trading very often. Wouldn't they be better off in a commission account over the longer term? However, again I believe the Commission would be naive to believe that broker/dealers are not going to pressure their sales force to constantly add fee paying clients to its roster. It is the firms interest which will override the clients interest.

As a former branch manager of a major broker/dealer, I can tell you that I had significant pressure to put clients into fee based accounts. Sadly, with my knowledge as a CFP, I knew full well that clients were not going to be taken care of properly over the long haul in these accounts, because the broker/dealer was not interested in taking care of clients. They were interested in taking care of their own revenue.

You tell me if this is a conflict of interest or not. As a branch manager, I had a 67,000,000 target in my last quarter, yes that's right, I said quarter. If I brought in a million dollar account, then I was credited with 1,000,000 to my asset target of 67,000,000. However, if I took that same 1,000,000 account and put them in a fee based account, then I was credited with an additional 1,250,000 in asset credit towards my target. Now where do you think my focus was as a manager? To make sure clients were getting great financial advice, or to make sure that I reached my asset target? I was crazy not to take advantage of putting everyone that I could into fee based accounts, when I received 225 percent towards my asset target. Wouldn't you agree? Again, where is the client in all this? Neglected that is where.

Broker/Dealers should register under the Advisors Act to insure that clients receive not only initial advice, but ongoing advice held to a fiduciary standard.

Thank you.

Proof once again that I know my stuff. It sure is telling now that there is a call for a fiduciary standard for broker/dealers and their registered representatives.

The broker/dealers won their lobbying efforts back then, and I fully expect them to win their lobbying efforts again. In other words, the fiduciary standard will have loopholes in favor of the broker/dealers that they will be able to drive their Mack Trucks through. They have all the political clout in Washington D.C. Clients unfortunately do not stand a chance. Wait and see.