More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The New Year is upon us, and perhaps the most significant event for the advisory industry has already taken place--the Rand report assessing the advisory and broker/dealer industries was released in early January. No doubt advisors, brokers, and industry officials will spend some quality time reading through the report, and will anticipate any possible regulatory actions that the SEC may take when it gets recommendations from SEC staff by early summer.
Granted, the fact that it's an election year (as we're all aware) may hamper any chances that the SEC--or Congress, if the Commission asks for legislative remedies--will act speedily in making sure some change is accomplished this year. Industry officials speculate, though, that Congress could hold some hearings on the Rand study's findings in 2008. The fact that the SEC is already down one commissioner--with another one set to leave--also puts the securities regulator on somewhat unstable footing, and may not bode well for any meaningful change to be ruled on this year.
Commissioner Annette Nazareth has one foot out the door as she announced October 2 her intention to leave the Commission to return to the private sector, while Roel Campos left the Commission in September to join the law firm of Cooley Godward Kronish. Word is swirling around, too, that SEC Chairman Christopher Cox wants to hightail it out of the Commission even before the Presidential election occurs, and won't stick around even if a Republican President is elected.
The Rand report revealed, not surprisingly, that investors are indeed confused about the differences between brokers and advisors. While previous reports have uncovered this, the SEC's primary mission is protecting investors, so the Commission should take the Rand report's finding "really seriously," says David Tittsworth, executive director of the Investment Adviser Association in Washington.
Joel Beck of The Beck Law Firm in Snellville, Georgia, which represents broker/dealers and advisors, writes on the firm's blog (www.bdlawblog.com) that the fact that clients generally don't understand the differences between brokers and advisors, "including the differences in responsibilities of the two, seems to create an opportunity to educate and sell clients on the different models, and allow wise firms to distinguish themselves from the competition." He speculates one remedy would be for the SEC to issue "updated regulations" that "require additional disclosures be given to clients to inform them of the differences between RIAs and B/Ds."
The Trouble With Disclosure
Disclosure is, indeed, the key to all understanding, notes Terry Weiss, a partner with Sutherland Asbill & Brennan in Atlanta. But he takes the view that investors' failure to read the documents they're given contributes to their lack of understanding of not only products, but also of their broker's or advisor's duties. While trusting their advisor or broker to adequately explain things to them is of paramount importance, investors "owe an obligation to themselves to review the documents that they are given," he argues.
In September, the SEC issued a proposed rule, "Interpretive Rule Under the Advisers Act Affecting Broker/Dealers," that some industry officials say will exacerbate investor confusion. The proposed rule reinstates three provisions related to rule 202(a)(11)-1, which was vacated by the District Court for the District of Columbia, in Financial Planning Association vs. SEC--the well-known ruling exempting brokers from being subject to regulation as investment advisors in fee-based brokerage accounts.
The FPA told the SEC in a recent comment letter that it's concerned with the "Special Rule" provision of the proposal because it is interpreting the broker exclusion rule under the Investment Advisers Act of 1940 to say "because you [the broker] act as an advisor for a particular account doesn't mean you're subject to the same [fiduciary] standards as all of the accounts of that client," says Daniel Barry, director of government relations for the FPA. The FPA's concern, he says, "Is that the fiduciary relationship has been interpreted as applying more to the relationship between the professional and client, as opposed to the specific type of account. This is where it gets into the 'two hats' area in that what many people say is, 'You can't be a fiduciary to somebody with respect to one type of account, and just say, okay, now I'm not a fiduciary with respect to this other kind of account.'" Now that the Rand study has been released, Barry says the SEC can "have a broader conversation about the fiduciary standard and when it applies and to whom it applies."
More Confusion on Tap?
Diahann Lassus, chair of NAPFA's Industry Issues Committee, says the proposal "will provide potential for confusion." B/D reps only have to abide by a suitability standard, she reminds, so when selling products they must ensure they're "suitable for where you are in life and your objectives." If I'm giving investment advice, however, "then my standard is significantly higher in always putting your clients' interests first. If I'm wearing both of those hats and switching back and forth between them, what does that do to the confusion to consumers?"
Aside from the Rand report, another newly released survey shows that the wealthiest Americans are shunning brokers and seeking advice from independent advisors. According to the new Spectrem Group Perspective report, "Relationships With Advisors," the nation's Ultra High Net Worth (UHNW) households (those with $5 million or more in investable assets), believe that brokers and advisors working for financial services firms provide biased advice.
The Spectrem report, which polled 300 respondents, found that 30% of UHNW households use a full-service broker as their primary advisor, down from 41% in 2001. Of respondents under age 50, only 26% use full-service brokers. Spectrem notes that advisor ratings have been dropping since 2001, and only 27% of those respondents who use a primary advisor give the advisor an "excellent" rating. Sixty-five percent of those polled who use independent advisors say they intentionally avoided advisors affiliated with a bank, brokerage, insurance, or mutual fund company. Fifty percent of those who use an independent advisor say they do so because they receive more objective advice, the survey found. The other UHNWs who specifically chose independent advisors said they were: seeking more personalized solutions (25%), greater expertise (17%), looking to access financial products from multiple providers (6%), or seeking a higher level of customer service (2%).
While the Spectrem report offers some great New Year's news for independent advisors, Terry Weiss with Sutherland Asbill & Brennan warns all advisors and brokers that they can expect a batch of new lawsuits to be brought against them in 2008.
Besides the market volatility that we've seen over the last 18 months or so leading to additional complaints and lawsuits, one new litigation area that's starting to "bubble up," Weiss says, are lawsuits involving subprime and collateralized mortgage obligations (CMOs). "What I'm now seeing are clients complaining they were unaware that income-oriented investments (like bond funds) had CMOs in them at all--but this [type of information] is disclosed." This year, he says, "will be robust in the securities litigation and arbitration area," and advisors should start assessing now which clients could be "problem clients," and consider having the "difficult conversations" they may have been putting off.
Washington Bureau Chief Melanie Waddell can be reached at firstname.lastname@example.org.