More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Recently, fi360 CEO Blaine Aikin wrote a column for InvestmentNews about the AICPA’s Code of Professional Conduct. Aikin focused on the opening line of accountants’ code, which precedes obligations to each other as professionals and to their clients. That first line reads: “As professionals, certified public accountants perform an essential role in society.”
According to Aikin, that stated goal “helps explain why accountants have the highest rating among financial occupations in terms of the public’s perceptions of trustworthiness. […] By accentuating the word ‘professional’ and reminding practitioners that their conduct affects more than themselves, their clients and their profession, the bar is set high for what is expected of those who agree to abide by the code.”
Aikin’s thoughts made me curious about how other professionals saw themselves in the larger context of society. Through the miracle of the Internet, I was able to get a pretty clear picture of the role that doctors and lawyers are expected to play. I would have said “quickly found,” but it seems that when professionals muse about something of importance, they tend to muse a lot.
Following a nice treatise on why the Hippocratic Oath, written over 2,000 years ago, has become outdated (go figure), I found a more modern nine-point Principles of Medical Ethics by the American Medical Association. As you might imagine, lawyers’ rules for professional conduct are a bit more extensive: Just the preamble to the American Bar Association’s Model Rules of Professional Conduct contains 13 points.
Still, both standards contain plenty of fodder for Aikin’s “higher bar,” and provide a stark contrast to the standards in the financial advisory profession: the CFP Board’s Code of Ethics and Professional Responsibility and the FPA’s Standard of Care. It’s no coincidence that the omissions from the advisory industry’s standards are also lacking from the current discussions in Washington about advisor reregulation and expanding the fiduciary duty: an underlying sense that professional financial advice is essential to a modern society. It’s also not surprising. If advisors don’t see themselves this way, it’s highly unlikely that anyone else will either.
It seems that other major professions do see themselves as not only providing valuable services, but contributing a great good to society. Of the nine points in the American Medical Association’s Principles of Medical Ethics, three of them address a physician’s larger role:
- A physician shall continue to study, apply and advance scientific knowledge; maintain a commitment to medical education; and make relevant information available to patients, colleagues and the public.
- A physician shall recognize a responsibility to participate in activities contributing to the improvement of the community and the betterment of public health.
- A physician shall support access to medical care for all people.
Adherence to these principles is a commitment not only to put their patients’ interests ahead of their own, but the interests of society, as well.
Of the 13 points in the preamble to the ABA’s model rules, four address larger duties such as improving access to the law, the administration of justice and the quality of service. The first rule notes lawyers’ “special responsibility”:
- A lawyer, as a member of the legal profession, is a representative of clients, an officer of the legal system and a public citizen having special responsibility for the quality of justice.
Let’s contrast these standards (and the AICPA’s as described by Aikin), with the FPA and CFP Board codes. Here’s the CFP Board’s Code of Ethics and Professional Responsibility for financial planners:
- Integrity: Provide professional services with integrity. Integrity demands honesty and candor, which must not be subordinated to personal gain and advantage.
- Objectivity: Provide professional services objectively. Objectivity requires intellectual honesty and impartiality.
- Competence: Maintain the knowledge and skill necessary to provide professional services competently.
- Fairness: Be fair and reasonable in all professional relationships. Disclose conflicts of interest. Fairness requires impartiality, intellectual honesty and disclosure of material conflicts of interest.
- Confidentiality: Protect the confidentiality of all client information. Confidentiality means ensuring that information is accessible only to those authorized to have access.
- Professionalism: Act in a manner that demonstrates exemplary professional conduct. Professionalism requires behaving with dignity and courtesy to clients, fellow professionals and others in business-related activities.
- Diligence: Provide professional services diligently. Diligence is the provision of services in a reasonably prompt and thorough manner, including the proper planning for, and supervision of, the rendering of professional services.
Notice the Board’s sixth principle, Professionalism. Here’s where financial planners might have committed to going beyond clients, peers or “business-related” activities. Yet, the planning profession remains silent on contributing to the greater good and, more importantly, seeing the role of financial planners as important to making our society work in an economically fair and just way.
The FPA Standard of Care manages to make the same omissions much more concisely:
“Whereas the public expects to experience a high level of confidence, trust and clarity in relationships with professionals trained in the distinct process and discipline of financial planning, it is essential that they obtain a commitment of professional care, quality and excellence in the services they receive. All financial planning services will be delivered in accordance with the following standard of care:
- Put the client’s best interests first.
- Act with due care and in utmost good faith.
- Do not mislead clients.
- Provide full and fair disclosure of all material facts.
- Disclose and fairly manage all material conflicts of interest.”
The underlying theme in the codes of conduct of the legal, medical and accounting professions is that the actions taken by these professionals, due to their specialized knowledge and experience, play an essential role in our society and to the people in it. The same should be said for a profession of financial advice.
In fairness, both the CFP Board and the FPA mention the public expectation of a high level of confidence in their financial planner, but the focus is still myopically on the advisor/client relationship. What’s missing is an appreciation of how important access to competent, professional advice is to the well-being of those clients and society. Citizens who manage their finances effectively not only don’t drain on our collective resources, they are in a much better position to support others who are not so fortunate, starting with aging parents, children and grandchildren. They are in a better position to invest in their communities through charities and through investments in businesses that hire people.
In today’s complex world, most people need help planning for their future, supporting their dependents, allocating their resources and managing their financial risks. Professional financial advisors play an essential role in helping people do that. But until financial advisors stop viewing themselves as the final link in the product distribution chain and take responsibility for the vital role they play in people’s lives, they—and their clients—will continue to be plagued by regulations based on “business model neutrality” and “suitability” standards.