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.
- 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.
It’s about 12 degrees outside, with four inches of snow on the ground. I sitting at my kitchen table, looking out the window at a clear blue sky with snow dusting the Pinion Pines that cover the hills between here and the snow capped mountains in the background. With the end of the year quietly sneaking up on us, it’s a setting that makes reflection impossible to resist.
To further stimulate my mind, James Holland kindly posted the following comment to November 29 blog, A BD Rep Surveys His Clients: The Fiduciary Issue Crystallized:
Bob, could not agree with you more. At some point the investors and plan sponsors are going to have to look in the mirror and say: ‘Now is the time for me to take some responsibility here and understand what my options are and who has my best interest first and foremost.”
In addition to his captivating “Bob, could not not agree with you more…” preamble, Mr. Holland raises this vital question: Just what can retail investors and other laypersons reasonably be responsible for knowing versus what knowledge is just too “inside baseball” for them to be expected to fully understand, regardless of how much “information” they are given on the subject?
This question, of course, is the basis of professional ethics in all fields: Professionals are restricted from using the advantage of their expert knowledge on a topic that is vitally important to the public for their own benefit to the detriment of their clients or patients. It’s what takes professional standards out of the realm of the customary business practices based on the principle of fair dealing between two equal parties: When a layperson is consulting a professional, the parties are not equal.
To my mind, this is the basis of our two-year debate over the reregulation of brokers and investment advisors. What the folks in Washington, on Wall Street and across the country are trying to parse is this: When are “financial advisors” salespeople who owe no duty to their customers other than fair dealing, and when are they advisors who owe their clients a much higher duty of care?
It seems to me that most reasonable people agree that there’s a legitimate role for both salespeople and advisors in financial services. The problem comes when those lines are blurred in the minds of the public, which often is no accident: salespeople and their firms gain considerable marketing advantage when their customers mistakenly believe they are dealing with professionals who are required to act in their best interests.
What that in mind, regardless of what happens in Washington in this go-round, it seems to me that to create a true profession, client-centered financial advisors need to work toward three goals:
- A clear fiduciary standard. Professional advisors must have an unwavering duty to put their clients’ interests first: no exceptions. That means at all times, under all circumstances; no two hats, no “scope of the engagement,” no “for some clients I am, for some clients, I’m not.” The public needs to know that when they retain the services of a professional financial advisor their best interests are at the top of the list, 100%, all the time, under all circumstances.
- Clear titles. We need one title to refer to a professional advisor, as described above, that cannot be used by others who do not meet the professional standards. The investing public is not equal to the task of determining when and if their “financial advisor” is acting in their best interest. As with MDs, CPAs, and lawyers, they need to know that if they go to a financial professional that’s called X (your pet title here), they will meet the credentials and the standards of a professional.
- Finally, we need a Glass-Steagall type of separation between businesses that create and sell financial products and firms that offer their clients professional financial advice. Let’s face it: the majority of our current wrangling over when and if a broker is or isn’t a fiduciary isn’t about the broker at all. It’s about their firms: principle trading, proprietary products, market making—when is it sales and when is it advice? All these conflicts arise because the firms are in the business of creating and selling, while brokers and advisors are in the business of advising.
The solution is simple: just separate those functions into two separate businesses. Product firms create and sell to institutions and other professionals; Retail clients go to advisory firms, when they can be assured of getting professional advice, without knowing beans about the inner workings of the financial services business.