More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.
The following exchange comes from "Silver Blaze" by Sir Arthur Conan Doyle, between Sherlock Holmes and Inspector Gregory: "Is there any other point to which you would wish to draw my attention?" Holmes: "To the curious incident of the dog in the night-time." Gregory: "The dog did nothing in the night-time." Holmes: "That was the curious incident."
Sometimes what isn't articulated is more important than what is. (In the story, the dog guarding the barn didn't bark because he knew the horse thief, greatly reducing this list of suspects.) In the case of then-NAPFA chair Diahann Lassus's testimony before the House Committee on Financial Services, what she didn't say is both curious, and in my view, far more informative about how the Financial Planning Coalition is going to use whatever clout it has.
As you may know, the Coalition was formed about a year ago by the FPA, the CFP Board, and NAPFA to discuss a more formal development of the financial planning profession. "We started talking about what all three groups could support," Lassus, who as past chair continues to represent NAPFA on the Coalition through the end of the year, recently told me. "What we came up with was a fiduciary standard for all financial planners, and the need for financial planning to be regulated as a profession."
So far, so good. When it comes to fiduciary duties, as with most things, the devil is in the details, but having the Big Three planning organizations talking to each other--and finding some common ground--can only be a step in the right direction. Apparently, the Coalition hadn't gotten much further in its deliberations when the Obama Administration dropped its bombshell white paper, calling for the sweeping reregulation of the financial services industry, including a "fiduciary duty" for those folks who deliver financial advice to the public, namely brokers and RIAs.
That's when things began to get curious. Keep in mind what we're talking about here is a Presidential call--with broad public support--for a radical realignment of the financial services industry. What's more, it contains a specific directive to correct what's widely regarded by professional financial planners to be the most onerous mistake in the Investment Advisers Act of 1940: the exemption which lessens the duty of care owed to clients by stockbrokers engaged in making sales.
A Level Playing Field
This is a once-in-a-lifetime opportunity to force brokers to play by the same rules as professional financial planners. While it might not be a panacea for all that's wrong with the industry, if done right--by requiring a genuine fiduciary duty of everyone who gives financial advice to the public--it's certainly a mega-step in the right direction.
Of course, the brokerage business, which at least believes it has billions at stake in the sale of financial products to the public, isn't taking this perceived threat passively. Its current strategy (see my September column), is to seemingly agree with the principle of a fiduciary standard, while working both overtly and covertly to water down any such legislation/regulation (with exemptions and loopholes) so that big firms can go on with the business as usual of selling financial products under the guise of advice.
So what might we expect from the unified representatives of the long-suffering financial planning profession when presented with this unprecedented opportunity? Perhaps a strategy assessment that since a fiduciary duty was specifically mentioned by the Administration, it's the battle currently being fought, and therefore, the one that can be won first? Isn't it reasonable to expect our profession's leaders to focus their efforts on attaining the half-a-loaf that's being so tantalizingly dangled before them, and then using the momentum of that victory to push for their second goal of separate regulation?
But no. Instead, in July the Coalition issued a "Statement of Understanding" stating that as Congress undertakes regulatory reform, it "will collaborate to achieve" four objectives: That financial planning is delivered with fiduciary accountability; that planners are "specifically" regulated; and that the public understands the benefits of, and can identify, a true financial planner. That's right: the ol' stick-to-our-message ploy, even when it's the answer to a question no one is currently asking.
Separate Regulation Focus
This thinking-in-a-vacuum was even more evident when Lassus testified on behalf of the Coalition before the Committee on Financial Services on July 17. I've known Diahann for many years, and have the highest regard for her both professionally and personally. She brings a professionalism and integrity that is above reproach, making her a perfect choice to represent a Coalition of organizations whose leaders have, over the years, sometimes left themselves open to charges of egotism and hidden agendas.
Despite that Lassus's remarks included scant support of the fiduciary standard, focusing primarily on the need for separate regulation of financial planners, which to my eyes, reads troublingly like opportunistic empire-building in a time that cries out for loftier ideals. "I come before you today as a representative of...three leading financial planning organizations dedicated to improving consumer access to competent and ethical professional financial planning advice," she began, curiously limiting the scope of her remarks to financial planning, rather than to the broader question on the table--a fiduciary standard for all financial advisors.
She went on to talk about her experiences as a practitioner, again, inexplicably focusing her remarks on financial planners: "Every time I meet with new clients I hear stories about their experience with other 'financial planners.' Many of them give even me nightmares." You gotta admit, this is some curious phrasing. I know thousands of financial planners, and virtually all of them have horror stories about how their clients were treated by other advisors--almost exclusively stockbrokers or insurance agents. But "other financial planners"? I can only assume she means brokers and agents masquerading as financial planners, but that distinction was lost on me the first 10 times I read this, and I'm guessing it was lost on our intrepid Congressmen as well.
Then she went on to apply this curious limitation to a fiduciary standard, as well. "Our goal is to have all financial intermediaries who offer broad-based financial advice subjected to the high standards of a fiduciary," she said. Is the implication that someone who offers only investment advice, or retirement advice, or estate planning shouldn't be subjected to fiduciary standards? Or that these other "advisors" simply aren't the coalition's concern?
Lassus answered these questions near the end of her statement: "We seek to apply a principles-based regulation to individuals providing comprehensive financial planning services or holding themselves out as financial planners, not to the firms that employ them. This leaves intact other regulatory coverage for institutions and operates consistently with existing federal regulation for broker/dealers and investment advisors, as well as state regulation of insurance producers, accountants, and lawyers."
This is pretty clear: the Coalition is solely concerned with regulating financial planners, period. In addition, they are very clear about treading lightly around the toes of other "industries" or regulators, if only they'll let 'em do it. While "we all share the view that... the fiduciary duty should apply to all who give financial advice to clients," it's just the financial planners they want to talk about.
It appears that the Financial Planning Coalition has indeed examined its priorities, and determined that while virtually everyone else who matters is talking about how to structure a fiduciary duty for all financial advisors, they've decided to focus on their other goal: making a power play to have financial planners regulated by an SEC-sanctioned CFP Board or if not the Board, presumably its successor.
With a fiduciary standard for all financial advisors on the table for the first time in 70 years, the Financial Planning Coalition isn't going to focus on that; they're going to answer a question that isn't even on Google: the separate regulation of financial planning. That's not just a dog that didn't bark: It's a dog that just won't hunt.
Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at email@example.com.