More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
Potts expanded on that foundation-building work in a follow-up interview, along with FPA CEO Marv Tuttle, with Investment Advisor editor James J. Green in an interview in Hoboken, New Jersey, on May 12, before the Senate passed Thursday, May 20, Senator Christopher Dodd's financial services reform bill.
During the discussion, Potts and Tuttle also discussed the FPA's five standards of care: 1) to put the client's best interests first; 2) to not mislead clients; 3) to act with prudence; 4) to avoid conflicts of interest; and 5) to disclose and manage unavoidable conflicts in the client's favor.
Q: There was a fair amount of talk at the retreat about taking the fiduciary message to members of Congress, especially on the banking committee, and educating them about the issues of financial planning. Have you seen some success there?
Potts: Members of Congress are puzzled, in a way, when a group comes to them and says: "We want regulation." Usually, it's the other way around: "We don't need it, we're already covered." That's the confusion we're trying to clarify. The term "financial planner" has been misused and abused in so many ways over the years that we would like a clarification to where we have a recognized, regulated profession of financial planning. We think that just makes sense for the public.
Five standards of care spell out fiduciary duty
Q: What is the FPA trying to accomplish with the Coalition in Washington?
A: It's really about the five-point standard of care of the FPA. We spent quite a bit of time working on those standards of care with two task forces. We're trying to clarify the confusion [faced by consumers] as to what the titles mean and what responsibilities a planner is held to legally. They don't see the fine lines in an engagement [with any advice-giver]; we'd like to see a bright line established saying a person is an investment advisor who delivers services in a fiduciary manner.
Q: The public may not understand how planners can make money through fees or commissions on an investor's portfolio. How does earning a living fit in with financial planners' duty to serve their clients?
A: The good thing about accepted standards is that they create a safe harbor for practitioners that operate within that system. We believe in reasonable liability but not unintended liability. I don't know if that's the right way to phrase it, but that's what our standard of care is getting at: Is this the way you should conduct business with a client?
Q: So who could possibly be against that?
A: It could be that some people may see this language and believe, "Well, that means that if I do get compensation through commissions, then I can't be a fiduciary." But we're not saying that. As an organization, we're compensation-neutral and business model-neutral. It's not so much about that as how you actually conduct business with your client. The Menendez amendment clearly states that this fiduciary standard does not preclude compensation through commissions.
Q: Is the public concern in response to the trust that's been shaken among consumers due to the Madoff Ponzi scheme and other scandals?
A: Let's go back to the Great Depression, when banks were failing and people were losing all their money. That was very disruptive to the financial system, so steps were taken to restore confidence in the banking system, including the creation of the FDIC. Now, financial advisors and institutions are asking what they can do to restore confidence in our own world. There's a window of opportunity to make serious change right now, but...we want to rid our barrel of bad apples.
History shows that crisis drives reform
Q: Has the recent Goldman Sachs inquiry added a sense of urgency to what you're doing?
A: I think it creates a favorable environment for change and reform based on abuses and this "Great Recession." If you go back to the history of legislation and regulation, it's usually reactive instead of preventative, and we're going through a period right now of reaction and regulatory reform. We want to be part of that.
Tuttle: We have to tend to our own shop as far as what's coming. Because we're compensation-neutral and business model-neutral, we're looking into how we can help our own members and others in financial services step up and answer the questions that are coming up: "How do I honor this fiduciary standard? How do I understand the legal, compliance and liability issues attached to that? How does fiduciary work within the financial planning space?" Traditionally, you think of fiduciary in investment management and trust, but it has never really been talked about in financial planning. So we came out with our standard of care, which led us down the path of helping our folks with best practices.
Potts: Don Trone [of fi360 fame] is developing five telecourses over the next couple of years, and has written a book on how to follow the fiduciary decision-making process--How do you live in this fiduciary world?--and it doesn't matter how you're compensated.
Q: What's the biggest challenge for the FPA? Is it growing membership?
A: The biggest challenge is finding the next generation of financial planners. We're looking for younger blood, not just for the FPA, but for the profession.
Q: What's the next step going forward with the Coalition and the other allies you've found, particularly over the fiduciary issue?
A: To reach our destiny, we have to cooperate, but we're not going to sacrifice our standards. The key to commonality is the fiduciary issue. That's what makes a profession--it's a calling, not a job.