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.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
In case you missed it, there’s a very interesting discussion following my last blog “Fiduciary Advocates: Call Out SIFMA and NAIFA.” True, it revolves around the same key issues that opponents of a universal fiduciary standard typically cite, namely, investor cost and choice. But in this case, Christian, who raises them, is an admitted lawyer as well as an advisor, and perhaps that’s why his points are far more reasonable than the usual blatantly self-serving responses I tend to get from my posts. Of course, that doesn’t mean that they hold any more water, just that they warrant more analysis.
The heart of Christian’s comments is captured when he writes: “Application of a fiduciary standard [to brokers] really only matters to the investing public when there is litigation and changing the standard of care will raise costs and effectively eliminate commission based advisory.” The first part of his argument is interesting, in that it sounds reasonable, in a lawyerly way. Yet upon closer examination, its contention—that laws only matter when they are broken—runs contrary to both common sense and to our experience.
Could we say the same thing about any law? A law governing driving, for instance? Speeding limits only matter to the public when speeders are brought to trial. Obviously, this would be silly. The effect of traffic laws, and most other laws, isn’t what happens if one is caught, but that the prospect of getting caught causes us all to behave in a more responsible way. I have to admit, that there have been times when on my Harley, I might have ridden faster, were it not for the prospect of a speeding ticket. I suspect that most of us have had similar experiences.
When it comes to a fiduciary standard, then, the benefit to the investing public is far from merely arising during litigation. It is the prospect of litigation—and of losing such litigation—that would compel advisors to do the right thing by their clients, if they might be tempted to do otherwise. I suspect that an even greater benefit would result from advisors’ brokerage firms compelling and insuring that their advisors act in their clients’ best interest, when, tempted with economic incentives, they might act otherwise.
What’s more, the application of a fiduciary standard would provide an even greater benefit to the public, by clearly stating what is—and what isn’t—acceptable behavior for anyone who provides personal investment advice.
I believe that the vast majority of brokers, like their RIA peers, truly want to do the right thing by their clients. Yet by holding them to a “lesser” standard, the brokerage industry has sent the message that it’s somehow okay to merely recommend investments and strategies that are “suitable” rather than truly in the client’s “best” interest. I suspect this standard confuses more brokers than it does clients.
The real benefit of a fiduciary standard for brokers will be to eliminate this culture of accepting less than what’s best for all clients, rather than what a few clients may or may not gain in court.