From the October 2007 issue of Wealth Manager Web • Subscribe!

A Long, Strange Trip

Having been in the wealth management industry for more than three decades, I've seen a lot of things come full circle in the financial markets. It doesn't bother me when I see that, over time, some "axioms" of the industry are no longer heeded as they once were. Times change.

However, some things do upset me, particularly when they relate to how we in the industry approach our clients and the issues where we take a strong public stance. Today, as it was more than 30 years ago, a key issue that we in the industry face is the importance that we attach to ethics.

I was a member of the world's first graduating class of 42 Certified Financial Planners in 1973. As a result, I have both a perspective on our business and a clear understanding of the fragility of reputation and credibility as they relate to investment, wealth management and economic conditions.

The fact that I chaired the committee on the International Association of Financial Planners (a predecessor to the Financial Planning Association) that wrote the first code of ethics for the financial planning industry also colors my vision. Now that we have apparently won the assault by brokerage firms over the "Merrill Rule," the industry must reinforce our continuing concern about protecting the fiduciary relationship that we maintain with and for our clients.

More than that, we have to remind--on a continuous basis--the industry, the regulators, the media and the public that any form of conflict of interest with regard to the relationship between a wealth advisor and a client is not simply an issue of perception.

There is no place in this industry for a nuanced approach to fiduciary responsibility. Although ethics is a core value at my firm, Salient Wealth Management, we've gone the additional step and made sure that one of our staff members is also an Accredited Fiduciary. Some may call it a version of "belt and suspenders," but there have been too many examples--gleefully highlighted in the media--of transgressions by some of the country's largest corporations and investment advisors for our industry to consider itself immune from additional scrutiny.

Those of us who are in the business of financial planning and wealth management should not take for granted that our clients--investors all--have a thorough understanding of what defines a conflict of interest. Or, for that matter, that they grasp the importance of a fiduciary responsibility versus a brokerage house calling itself a "wealth manager" and, at the same time, claiming it does not have to adhere to rules that enforce the fiduciary aspects of a client relationship.

Try as I might, I cannot be comfortable that the challenge of the "Merrill Rule" has been defeated. While it was gratifying to note that the courts ruled against the Securities and Exchange Commission and the brokerage industry, it was disheartening that the court later pushed off implementation by delaying it for 120 days.

There are too many hundreds of billions of dollars tied up in fee-based accounts at the major brokerage firms to believe that they will go quietly into the night and return to their transaction-based roots.

As I constantly remind my staff and my industry colleagues, the fiduciary responsibility and the ethics codes and guidelines that govern our industry are not merely processes by which we operate. More importantly, we must be constantly diligent to ensure that we respect both the letter and the spirit of those regulations. While there are clear tests by which we can measure how we act against the rules, there is a "personal" requirement that we step back and determine if our actions are ethical, appropriate and in the best interests of our clients.

A bit of history might be helpful to put the ethics, conflict of interest and fiduciary responsibility issues in their proper light.

In 1933, the SEC established the Securities Act, which set out the acceptable standards for commissioned sales people. In 1940, the SEC created the Investments Advisers Act, which detailed how financial professionals, who were charging ongoing portfolio management fees, would be governed. Essentially, the SEC said that fee-for-services financial advisers were to be held to a higher standard, and that they had to place their client's interests in the primary position.

For decades, these were the broad guidelines for an industry that otherwise had all the aspects of the Wild West, with veritable Black Hats buying and selling investments in a commission-based environment versus the White Hats who sought to earn their fees by acting in the clients' best interests. In the 1990s, as discount brokers drove the prices of stock transactions down and commissions began to dry up, Merrill Lynch saw the proverbial handwriting on the wall.

In 1999, Merrill came up with a novel but inherently ethics-defying proposal: Let our commissioned brokers charge fees for advice as do members of the financial planning industry, but don't saddle them with the fiduciary (and ethical) responsibilities that the 1940 Act mandated. With no fiduciary responsibilities, salespeople could be given incentives to steer clients to products offered by their own firm with no regard to how they stacked up against competitive products.

As a backdrop for this end run around ethics, investors have been forced to deal with:

o corporate scandals, ranging from WorldCom to Enron to Hewlett Packard;

o the implementation of Sarbanes-Oxley and the resulting scrambling by public companies to bring their houses in order;

o the options backdating scandals at companies such as Apple Computer and United Healthcare Group;

o continuing "restatement" sagas of global companies as disparate as GE and Nortel.

Even in this environment, I am often asked why I spend so much time thinking and talking about ethics. The answer is actually quite simple: In the business of wealth management, ethics are not optional. They are the single value upon which our industry is based. Without ethics, we have no credibility. Without credibility, we have no firm ground from which to attract clients.

It is comforting to note that ethics are taught at every level in college and university business courses. It has been extremely important that the Certified Financial Planner Board in recent months has updated its ethics policy.

The reality is that at no time in our history have investors been so besieged by as much information about as many questionable practices as in the past decade. Blame it on the Internet; blame it on corporate greed; blame it on the globalization of economies.

But, in the end, it means that our clients will continue to find it more difficult to reach the "safe harbor" of fee-based investment advice unless we can unequivocally convince them of our adherence to ethics, our abhorrence of conflicts of interest and our adoption of fiduciary responsibility as an operating principle.

Richard Stone, CFP, is founder and CEO of Salient Wealth Management, LLC, a Registered Investment Advisor in San Rafael, Calif.. He serves on the Golden Gate University Financial Planning Advisory Board.

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