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.
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
On the heels of the June 25 final wording for financial reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Foundation for Fiduciary Studies (FFS), unveiled an "evolved" fiduciary process and a new president, Louis S. Harvey. He is the president and CEO of Boston-based Dalbar and founded that firm in 1976.
While the fiduciary standard as in the Investment Advisers Act of 1940 is used by "trustees and investment committees," the new fiduciary process FFS announced on June 28 is meant to be flexible enough to be used by wealth managers, financial planners, fiduciary advisors under the 2006 Pension Protection Act, according to FFS Founder Don Trone, who spoke with WealthManagerWeb.com on June 29. Trone is also chief ethos officer of Strategic Ethos, a leadership and decision-making framework for fiduciaries and leaders. The"2010 Fiduciary Standard" is designed to be used by a wider group of practitioners than what Trone calls the "2003 fiduciary standard."
"This new language" Trone explains, "uses universal or general terms, which will give greater flexibility for application. We've already seen how we can use it to define a financial planning standard for the FPA (Financial Planning Association); a wealth management standard on the heels of Madoff....We would anticipate the SEC using similar language when they come out with their harmonized standard in six months." The new process is, "an evolutionary growth and improvement on defining the [fiduciary] process."
How does the model deal with the carveout for a more limited ongoing monitoring for the re-regulatory language? Trone says, if you think about traditional broker/dealer sales, that sales relationship is just that; transactional--ongoing monitoring is not part of that transactional deal. The new legislation doesn't do away with that transactional, sales relationship with customers--for those brokers who don't give investment advice. There would be a "demarcation" between the sales and advice arms of brokerage firms that would need to comply with a fiduciary standard for those brokers who want to provide advice.
"Comprehensive and continuous," are the words Trone believes will divide sales and information from recommendations and advice. "If an advisory relationship is comprehensive and continuous, it will be deemed a fiduciary relationship. When you talk about monitoring, I believe the staffers are using the word monitoring in context of continuous."
But what about a more limited scope of engagement?
Let's say you are talking about a varying scope of engagement model? Garrett Planning Network chief Sheryl Garrett describes the model where someone does not need or want to pay for "continuous and comprehensive" monitoring. She likens it to the doctor visit where the doctor says, exercise more, lose 10 pounds and take these vitamins; check back with me in a year (or six months, or each quarter)--but I am not going to monitor your blood pressure in between. And if you have any questions or something happens that you want to talk about call me. So the scope is more limited, and the client knows this at the beginning and could choose a more comprehensive monitoring if she so desires. But the advice is based on a fiduciary process and there's an ongoing relationship.
That may be covered, says Trone, under an FPA fee for planning fiduciary model, where some planners even do the actual plan, under the fiduciary process, but the client implements the plan himself or herself.
But in addition, "for the client that is looking for impartial and objective advice there's still the RIA (registered investment advisor) model, where the client can walk in and say I need recommendations for five funds for mi IRA but I don't want to enter into a comprehensive asset management agreement with you--that would still be a fiduciary engagement under the RIA requirements. That's one way the public can access that best interests standard."
Is this the answer to the oft-used argument by some lobbyists that if there's a fiduciary standard for brokers who provide advice, smaller investors wouldn't be served?
"With the proliferation of no load funds...we can cost-effectively provide a fiduciary engagement to a relatively small client," Trone notes. Diversification is one of the challenges in serving a smaller client than that, Trone observes. But there are also good do-it-yourself options, such as one he "developed for Schwab back in the mid-'90s," the "Schwab AIM (Advice and Information Model)" that Schwab used in their B/D branches, Trone says. When you consider minimum investment sizes for many mutual funds, and you want to diversify the allocation to maybe five or so funds, you get to around that "$35,000 to $50,0000," account size, Trone notes.
"Recruiting and training" challenges
It is probable that broker "training and recruiting" in a new fiduciary advice model would substantially change, Trone says. There may be a mentoring role for established advisors who become fiduciaries. Newer reps may not be permitted to advise as fiduciaries before they have completed additional training and a period of working with a mentor. So new brokers would be "selling" not advising, until they get the kind of investment theory, asset allocation and other training they'd need to act with prudence as fiduciaries.
The next step for the "2010 Fiduciary Standard," says Trone, is, after the FFS board approves, to get the process under which it was developed, accredited by the American National Standards Institute (ANSI).
Comments? Please send them to firstname.lastname@example.org. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.