More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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.
A new nonprofit organization called the Institute for the Fiduciary Standard will take up where the Committee for the Fiduciary Standard has not quite left off, “establishing a permanent entity that is focused exclusively on education regarding the fiduciary standard and why it’s so important” to investors and the financial services industry, in the words of cofounder Knut Rostad. In addition to education, the Institute will also play an advocacy role and sponsor academic research and events exploring the issues surrounding a fiduciary standard.
The first of its events will be held Sept. 9 in Washington, a panel discussion, Crafting Effective Disclosure, with panelists including Professors Daylian Cain from Yale, who will present an unpublished paper on the academic literature that deals with disclosure effectiveness, and Arthur Laby from Rutgers.
In an interview Tuesday, Rostad said that focus on the effectiveness of disclosure “will be an important contribution to the discussions taking place in the agencies—the SEC and DOL” on the issue. In the best academic tradition, the institute is welcoming a broad range of opinions on the issue Rostad said he has received commitments from representatives of the Financial Services Institute and SIFMA to speak at the Sept. 9 event. The institute will announce in September an additional sponsored event planned for later in the fall in New York.
Rostad (left) was also the driving force behind the Committee for the Fiduciary Standard, which was formed in 2009 to educate and advocate for a fiduciary standard (following five basic principles) in the wake of the financial crisis and in the horse trading that led to passage last year of the Dodd-Frank Act. The committee will now be led by Harold Evensky of Evensky & Katz as Rostad and six other committee members resigned to take up membership on the institute, which will be based in Washington.
In addition to Rostad, who is an advisor and chief compliance officer at Rembert Pendleton Jackson in Falls Church, Va., the other founders of the institute are:
- Marion Asnes and James Patrick of Envestnet
- Maria Elena Lagomasino and Michael Zeuner of GenSpring Family Offices
- Philip Chao of Chao & Co.
- Kate McBride, formerly wealth editor of AdvisorOne and now of the Institute for Private Investors.
Roger Ibbotson has agreed to serve on the institute’s board as well. The founding members are expected to contribute both intellectual capital and funding to the Institute, which has applied for 501c(3) status in the state of Virginia.
In its formal announcement, the institute says it will advocate for the fiduciary standard “under the Investment Advisers Act of 1940, which requires investment professionals to put their clients’ best interest first.”
In the announcement, Rostad argues, “Fiduciary advisors who meet the 40 Act
requirements and brokers who just meet the minimum ‘suitability’ standard (many brokers voluntarily exceed these minimums) live in very different worlds. Fiduciaries must disclose all unavoidable conflicts and always be able to show regulators why their recommendations are in their clients’ best interest; brokers need not disclose material conflicts, or control investment expenses, much less recommend what’s best for clients.”
The clear need for a fiduciary standard, he said, is evidenced by the “huge coverage gaps as to when the fiduciary standard is applied that undermine the fiduciary standard’s protection of investors. Our mission is to work with regulators, industry leaders and other groups to advance fiduciary principles and help build a fiduciary culture that closes this gap and extends equal protection under the law.”
See Bob Clark’s August 23 blog arguing that the Institute’s formation “elevates” the fiduciary conversation.
See Kate McBride’s multipart series on the fiduciary standard and Dodd-Frank.
See a slideshow on AdvisorOne highlighting the achievements of Dodd-Frank on its first anniversary.
See Ken Silber of Research magazine’s exploration of the history of the fiduciary standard.