More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
In addition to badgering me yet again about attaching adjectives such as “genuine,” “authentic,” or “real” to the word fiduciary, John Hawkes raises a very important question about clients’ responsibilities in his comment to my last blog on political realities. Let’s start with the semantic issue first, and then move on to bigger things.
The reason that I and most other proponents of a fiduciary standard for all retail financial advisors feel the need to bolster the terms “fiduciary standard” and “fiduciary duty” with a reference to its authenticity is that its opponents have adopted a strategy of appearing to support a fiduciary standard in principle, and then actively lobbying to water it down to the point of adding no new investor protections at all.
And they seem to be succeeding. Case in point: The Dodd-Frank Act itself includes carve outs for three of the most egregious conflicts of interest in the retail brokerage business: commissions, proprietary products, and failure to have an ongoing duty to the clients. So, yes, to answer John’s question: Many folks are advocating a “false fiduciary standard,” and that’s why we feel the need to continually remind folks that simply calling something “a fiduciary standard” doesn’t make it a genuine fiduciary standard.
Which brings us to John’s second excellent question: “What are the client's responsibilities under such a standard, by the way?” This is exactly the point. Our current broker regulation—and a false fiduciary standard that would perpetuate it—makes the client responsible to decide how important each conflict is, and leaves the broker without any responsibility to act in the best interest of the client. A real fiduciary standard, on the other hand, gives the advisor the responsibility to avoid conflicts of interest when possible, or disclose them when unavoidable, but in either case, to always act in the client’s best interest.
Wall Street seems to be pulling out all the stops to avoid such a standard for its brokers, but you can be sure that if they succeed, they’ll be the first to claim they have adopted a duty as stringent as RIAs.