Wednesday, July 8, 2009

The Schapiro Doctrine

"If my sources in Washington are right, by the time this column is published, SEC chairman Mary Schapiro will have either announced her grand unification scheme for 'modernizing' financial services regulation, or will have signaled her intent to do so shortly. Like all good journalists, I've been studying everything Schapiro says for clues to what's coming. She has made this task immeasurably easier by saying just one thing over and over again. ... There are two small problems with these oft-repeated statements--what I call the Schapiro Doctrine [SD]: 1. Brokers and adivsors do not provide the same services. ... 2. The main job of those who protect consumers (and regulators surely belong in this catagory) is to help the public recognize these differences, and to act accordingly. ... If the [SD] is indeed a valid foundation for regulation, perhaps the government should consider improving all consumer protection by applying it to other fields and endeavors. ... Instead of warning the public, the regulatory authorities would follow the [SD] by carefully documenting the public's inability to distinguish between a person who had actually passed the bar exam and young salespeople of legal documents. ... The logical pattern of the [SD] would subject any profession to the threat of some outside sales organization coming into the market and blurring the distinction between professionals and salespeople. ... Let's call a spade a spade. The [SD] is a sly abdication of regulatory duty, a willful substitution of consumer confusion for regulatory insight and oversight", Bob Veres at Financial Planning, June 2009, link:
"Buried in President Obama's proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher 'fiduciary' standard that would compel them to place their client's interests ahead of their own. ... The move could change the way products are sold and marketed and even how brokers are compensated. 'This is a smart and overdue move' for the large brokerage firms owned by investment banks, says Sallie Krawcheck, who formerly ran the wealth-management business at Citigroup Inc. 'It's certainly a victory for clients.' ... But requiring brokers to operate under a fiduciary standard could force them to offer products that are less costly and more tax-efficient. They will have to disclose any potential conflicts of interest, such as any fees they may get for favoring one product over another. ... The proposal addresses a long-simmering debate over how brokers and investment advisers, who have traditionally offered more financial-planning advice, are regulated. ... The tougher fiduciary standard would also discourage brokers from charging trading commissions instead of fees based on a client's assets, says Alois Pirker, a senior analyst at Aite Group LLC. That is because brokers could be accused of recommending trades simply to drive up their commissions", my emphasis, Jane Kim and Aaron Lucchetti at the WSJ, 19 June 2009:

I agree. Schapiro is another "financial services" industry shill.

If this is a "smart ... move for ... investment banks", how can it be good for their customers? Retail brokerage should be separated from investment banking. There are many ways brokers cheat customers. Here's beaut: putting customers in high cost mutual funds when lower cost options are available.

1 comment:

Anonymous said...

Now is the time to make the brokers squeal... they have been been scamming institutional and retail clients... if Chairman Shapiro doesn't put the screws to them now then a huge opportunity to protect all investors will be missed...

Notice how quiet the financial firms are? They are not worried... nothing is gonna change... just keeping their head down... the status quo will remain intact.