From the April 2007 issue of Boomer Market Advisor • Subscribe!

Suitability and competence remain advisor hallmarks

The capital market structure in the United States is the epitome of the two-edged sword: It's the most heavily regulated capital market in the world, and, at the same time, it's the most accommodating for new products and alternative investments. This dynamic structure allows creativity and competition in the development of investor strategies.

The challenge for regulators is in determining an appropriate level of protection for investors whose understanding of investments rivals that of the professional.

There will always be a regulatory focus on product. However, the advisor and his practice face closer scrutiny. Professional competence and suitability are two areas of this renewed scrutiny, especially for clients whose expertise means they do not meet the traditional definition of retail investors.


You know the phrase risk tolerance and suitability. Many of you may not know that the regulatory definition of suitability tends to be arbitrary. In firms where the overall client base varies, the application of suitability as a transaction qualifier is very different from department to department, and yet the rule addressing suitability is constant. Indirectly, boomers are responsible for this fluid and elusive application of the concept of suitability. Generally, today's senior market participants don't hang glide, bungee jump, mountain bike or extreme ski. Most of them adopted the traditional retirement expectation and planning of the previous generation -- conserve and preserve.

Boomers, on the other hand, are taking retirement and retirement planning to a new level. Thanks to this demographic, appetite for risk is now an applicable concept. Although this is not a new concept in investing, the amount of interested people has pressured product providers to answer their demands.

This meeting of the old and new comes with new regulatory language. Many insurance policyholders who didn't make a direct connection between the market and life insurance were met with a margin call on their variable life insurance policies. Past SEC Chairman ArthurLevitt introduced a system of order processing accountability. New York Attorney General Elliot Spitzer took this accountability to an institutional level. Past SEC Chairman William Donaldson introduced the word "retailization" in an effort to identify gaps between a fast-growing, non-regulated product base and a not-so-fast growing understanding of those products by investors.

Professional competence

Professional competence has always been a key characteristic of an advisor's practice. That won't change. However, simply being competent at completing paperwork and record keeping is no longer enough. The deeper understanding of investing on the part of your boomer clients, coupled with more detail in new and alternative investment products, demands more competencies from advisors.

New products and alternative investments have characteristics that are qualitative in nature. Since the rule requiring the registration of hedge fund advisors was overturned, a new interest in the advisor practice is developing. The advisor is expected to thoroughly understand the new products and alternative investments he recommends. In the past, you could have the managed account advisor or the alternative investment wholesaler present the investment. Now, you have to know (and document that you know) the product well enough to meet your fiduciary responsibility. Building this competency isn't easy.

Hedge funds are not allowed to advertise at large. Because of regulatory pressure, performance numbers are hard to come by. New products and alternative investments come with their own language, their own economic area of interest, flexibility and illiquidity. Professional competency for the boomer market means thoroughly knowing your client and the product you recommend.

As capital markets consolidate, the opportunity to invest in dynamic global conditions presents itself. Boomers bring new attitudes to the table, and the pressure is on as a professional fiduciary to meet their demands. Be thorough when evaluating your boomer clients' qualifications for alternative investments. Demand information and transparency from your alternative investment provider. Lastly, be sure to protect your marketing and networking methods.

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