As we mentioned a while back, part of my training as a new Dealbreaker editor involves getting a CFA charter so that I can use past returns to guarantee future results. To that end, I’ve signed up for the December Level I exam. Thanks for all of your helpful advice on studying, by the way - I didn't get to read all of them, but I’ll just go ahead and assume that the overall gist was “read every hundredth page of the books, guess C when in doubt, and drink heavily before, during and after the exam.”
Nonetheless I did get the books last week, so I opened them up to see what I’m getting myself into. Study Session 1 is ethics. Coming from a job on Wall Street, this was all new to me. I was particularly interested to see the CFA’s a refreshingly straightforward fiduciary standard in its code of ethics:
Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.
This is higher than the standard applicable to brokers in the U.S., who are subject only to a suitability requirement, which says that they “must make recommendations that are suitable for customers based on their financial situation, needs and goals." It’s not entirely clear what this means: it clearly means “don’t put 100% of an elderly widow's portfolio into SinoForest stock,” but other than that it provides pretty wide latitude. It certainly doesn’t require brokers to find the best products for their clients, or to put the client’s interests above the firm’s – which means that brokers can push worse products that make them more money, rather than better products that make them less, as long as the worse products are still “suitable.” (Registered investment advisers, and sometimes big firm brokers, are subject to fiduciary standards, and there are efforts afoot to apply them to all broker-dealers all the time – but as of now there’s still a two-tiered standard.
I thought of all this in reading reports about Sallie Krawcheck’s departure from Merrill Lynch. As John Carney reports, Krawcheck fought to keep eat-what-you-kill compensation for the brokers and “had a reputation as a defender of client interests, resisting pushes from other parts of the bank to twist the arms of brokers to put their clients into other bank products.”
That was a big deal for the brokers – both the money and the independence. As Josh Brown sums up in his great take on Krawcheck’s departure:
Sallie couldn't change the fact that the brokers have no interest in peddling bank products or making referrals to other divisions within the slimeball supermarket. She also couldn't change the fact that the clients are wise to game as well and that they are not very excited about having their retirement accounts be "synergized" either.
Sallie couldn't change the fact that the jig is up, and everyone knows that Merrill Lynch's fiduciary responsibility is to the shareholders of Bank of America first and the clients second.
So how should we take the news that the new head of wealth management is a “products guy” who has “negative charisma”?
More importantly, with Krawcheck out the biggest name on BofA’s bench (behind the “most unqualified CEO in all of corporate America,” so, y’know, keep an eye on that bench) is Tom Montag, who achieved immortal fame at Goldman Sachs by calling the Timberwolf CDO “one shitty deal” in an email.
Montag grew up on a trading floor, where the legal standard for client trades is suitability. To oversimplify a bit, the job of a sales and trading division is to sell products to counterparties that make the firm the most money possible without being outright frauds. (Or, failing that, while being outright frauds.) As a trader, of course his thoughts on Timberwolf were “I’m glad we sold that shitty deal to our customers” – but that's not the reaction that someone who thinks like a fiduciary would have.
But Montag’s promotion and Krawcheck’s demotion/dismissal is a pretty good symbol of where BofA is headed. As Felix Salmon puts it, “if you’re a wealth manager at Merrill Lynch or US Trust, you’re working for your clients first, and your clients are not going to be happy if they think that you’re ultimately working for BofA’s shareholders.” With Tom Montag in charge, there won’t be much doubt about that.
As a CFA™ Candidate® – and ipso facto a booster of the fiduciary standard and the rest of the code of ethics that I fully intend to read between now and December 3 – I hereby shake my head disapprovingly at this. But realistically I can’t get that upset about the marginalization of retail wealth advisors. There is a real mystery about what value traditional investment advisers offer to retail clients (maybe it’s products). Perhaps I'll find out the answer as I diligently read the six volumes of CFA curriculum - or perhaps the whole notion of taking a percentage of assets to tell clients to diversify is not entirely consistent with fiduciary duties.
So I sympathize with Brian Moynihan's apparent move away from Merrill's retail advisory tradition. And I look forward to watching Tom Montag finish the job.