More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Looks like I struck a nerve or two with my last blog of Jan. 16 for AdvisorOne: Fiduciary Debate: What if Doctors Could Act Like Advisors? As I was reading through the excellent comments from readers, it occurred to me that there’s another parallel between medicine and financial advice that’s extremely relevant to the current fiduciary debate: The Blame Game. That is, in our litigious society, people often sue both advisors and doctors solely on the basis that the outcome of the service rendered wasn’t what they wanted. As far as I can tell, many of the opponents of a fiduciary standard for brokers are concerned about the potential for increased liability under our currently all-too-wealth-redistributing legal system rather than the relative safety of an industry controlled FINRA.
Personally, it seems to me that much of this problem lies with our strange modern cultural denial that bad things can happen to anyone: so if they do, it has to be someone else’s fault. Rather than seeing the truly miraculous things that modern medicine can do to save lives, prolong lives and just make our lives better, we seem to be entirely focused on the amazingly small percentage of the time that doctors and hospitals fail to perform miracles, and make them (and the rest of us) pay dearly for their fallibility.
Traditionally, doctors have defended their liability in a profession where no one bats a thousand—and the strikeouts can be catastrophic—through standardized medical and surgical procedures. But as skyrocketing malpractice insurance rates show us, today’s “juries of our peers” love to hand out money to “victims” irrespective of whether any malfeasance actually occurred.
On the advisory side of this legal lottery system, so far, the courts have been surprisingly reasonable about not viewing investment losses alone as evidence of professional negligence or worse. Still, a glance into any financial consumer magazine published within the past, say, 20 years or so is almost guaranteed to contain at least one story vilifying a financial advisor or firm on the basis that one of the investments they recommended failed to make money for their clients.
As I’ve heard compliance attorney Brian Hamburger tell groups of advisors a dozen times or more, failing
With this social backdrop that consumers are entitled to perfection and to be handsomely compensated by anyone who fails to deliver it, it’s likely just a matter of time before the courts start letting financial clients cash in. Which, of course, makes the FINRA suitability standard and arbitration system very attractive. The problem is, as you might expect with an industry SRO, it goes too far: protecting brokers and firms at the expense of their clients, at least by RIA standards.
Is there a middle ground? One that better protects financial consumers while still protecting advisors from legal awards based solely on inevitable investment losses? I believe there is. It’s a fiduciary standard based on acknowledging both issues: that clients need protection from the conflicts inherent when “advisors” work directly for product-marketing brokerage firms, and that all advisors need safe harbors from which to provide sound advice about turbulent financial markets.
And both these issues are well within the SEC’s purview to address—and its mandate to regulate financial markets and protect financial consumers.