More On Legal & Compliancefrom The Advisor's Professional Library
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
At the time of this writing, despite my inquiries, the Financial Planning Association has neither confirmed nor denied recent reports in the media that its membership has fallen 15% percent over the past five years, and is currently falling at a net rate of some 600 members a year. So I’m going to assume those reports are true. Which means, to my mind at least, the FPA deserves a bag of kudos and a standing ovation from the financial planning community.
No, I’m not usually a less-is-more kind of guy, but in this instance, that does seem to be the case. In recent years, as the securities industry, financial consumers and the media have slowly, but steadily, moved toward a profession of financial advice, the guiding light in the financial planning world has been the FPA. While the CFP Board has been trying to swell its ranks of CFPs at seemingly all costs (provided those costs are born by current CFPs), the FPA has been steadily defining what a profession of financial planners would look like.
Some, like Andy Gluck recently wrote, have attributed the FPA’s “membership slide” to the group’s “bold positions that alienated some in its traditional membership base.” This is a reference to the FPA’s successful suit to stop the SEC from expanding the ‘40 Act broker exemption to the fee-based management of client portfolios; divesting itself of its broker/dealer division (which became the Financial Services Division, the FSI); its support of a fiduciary standard for brokers; and opposing FINRA as the self-regulatory organization responsible for RIAs. In addition to their 'boldness,' these are also all positions that advance the profession of financial advice. Despite its inexplicable partnering with the CFP Board (with NAPFA in forming the Financial Planning Coalition) in the debate over financial reregulation, it’s the FPA that is in the vanguard of creating a profession of financial planning.
One of the distinguishing characteristics of a profession is that it won’t be for everyone. I’m not talking about quotas here, or trade barriers to keep wages high; it’s simply that not everyone is willing to accept the high standard of a profession—especially in an industry like financial services where there’s still so much money to be made at the expense of the marks, er, I mean, clients.
The idea is that with specialized knowledge that can be critical to clients or patients, professionals are supposed to uphold a code of ethics against taking unfair advantage of those clients or patients. Rather than doctors charging as much as people would pay for cancer surgery or chemo, or lawyers negotiating fees on capital cases, professions evolved rules against that sort of exploitation, which in part is behind the thinking of the fiduciary duty to put the clients’ interests ahead of your own. But as we all know, that kind of thinking can get in the way of maximizing revenues.
So it should come as no surprise that as the FPA has been leading the way down the path toward a true profession of financial advice, some of its members have opted out. That’s the price of creating a profession. It takes real fortitude and foresight to be willing to pay that price to become a profession. Of course, the payoff will be that as the public, through the media, becomes aware of the advantages of working with a professional advisor, and the disadvantages of the alternatives, the true professionals stand to gain, big time.
If nothing else, the debate over a fiduciary duty for brokers has raised the public’s awareness considerably, as shown by the survey data that many brokers themselves support such a standard. It’s unfortunate that other organizations such as the CFP Board seem to still care more about market share than professionalism—but that only serves to show how truly farsighted the folks at the FPA have been, and are today.