More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
With 20 years of investment management experience under his belt, Tom Grzymala is on a mission to see that "the full meaning and spirit of fiduciary responsibility" is preserved--particularly now that the Pension Protection Act states the advice must be given by a fiduciary advisor. A former RIA, Grzymala is an Accredited Investment Fiduciary Auditor and now serves as a securities litigation and arbitration expert witness through his company, Forensic Analytics in Keswick, Virginia.
Washington Bureau Chief Melanie Waddell spoke with Grzymala in early September about ensuring those advisors who proffer advice are living up to fiduciary standards.
What types of issues will be raised now that the Pension Protection Act requires that investment advice be given by a fiduciary?
The Pension Protection Act states that the advice is to be provided by a fiduciary advisor. A lot of the broker/dealers and insurance companies have their own funds [within 401(k) plan offerings]. This fiduciary advisor [standard may] affect insurance companies and broker/dealers--people who are working for a part of the take--meaning, "Buy my funds and I make more money!" Many companies charge a fee for the advice that they give to the plan, and they also get a fee because participants are buying funds from that company--so they're getting management fees inside, which is like double dipping.
I think the fact that advice must be provided by a fiduciary advisor carries significant weight, but Treasury and the Department of Labor (DOL) cannot allow conflicts of interest to happen.
How can Treasury and DOL ensure conflicts won't occur?
They've got to spell out in distinct terms what can't happen, [much like] the Merrill Lynch rule, which says a broker/dealer that provides investment advice solely incidental to selling stocks and bonds is free and clear [of fiduciary liability]. Fiduciary duty is the highest standard of care there is.
Are they working on such language?
I haven't seen anything that says DOL is working on it. I think it's for the financial planning and investment advice community, vis-? -vis the broker/dealer community, [to press the issue]. Pension planning gets into financial planning; it's not just the portfolio itself, but looking at the other ingredients in the 401(k) plan participant's financial landscape. The persons providing investment advice also have to be aware of broader financial planning issues.
Where will the guidance come from?
It's up to the financial planning industry to gather their resources to help DOL and Treasury define what constitutes a fiduciary advisor and make it known not only to the seller side, but to participants, plan sponsors, and all of the CEOs and CFOs of companies--they have to be aware of what constitutes fiduciary responsibility. [Companies] are at risk; they are at greater risk if they let anyone wander in and peddle products without revealing conflicts of interest. A lot of the work that Don Trone at the Center for Fiduciary Studies has done is helping along these lines, and NAPFA is working on a yearlong Focus on Fiduciary program to educate consumers.