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.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
As the SEC takes steps toward rulemaking on the fiduciary standard for brokers who hold themselves out as advisors, and the Department of Labor prepares to extend fiduciary requirements to cover more brokers who work with retirement account holders, fi360 and AdvisorOne have jointly conducted their second annual survey of investment advisors and brokers concerning their attitudes about the fiduciary standard.
In March and April of 2012, 380 advisors from across the business model spectrum took the time to complete the survey, which not only sought their opinions on the fiduciary standard but also gauged their understanding of what such a standard means now, or would mean, to their businesses.
The top-line findings of the 2012 fi360-AdvisorOne.com Fiduciary Survey? Most brokers and advisors agree that investors don’t understand the differences between brokers and investment advisors. They believe that extending the fiduciary standard to brokers would help restore investors’ confidence in—and raise the credibility of—financial services providers. But there may also be a disconnect between the fiduciary duty that many brokers already have assumed and some of their employers and associations that have resisted extending a fiduciary duty to all advice-givers. Key survey findings are delivered here as they are being presented Thursday at the fi360 Annual Conference in Chicago.
- 97% of respondents, up from 96% in 2011, say investors do not understand the differences between brokers and investment advisors
- 65% of respondents believe the fiduciary standard (no less stringent than in the Investment Advisers Act of 1940) would help restore investor confidence in financial service providers
- 70% of respondents believe the fiduciary standard would raise the credibility of financial services providers
The survey was open to all brokers and investment advisors, and gathered information from respondents about their compensation models, registrations and prior registration status. (View the 2011 AdvisorOne-FI360 survey findings here.)
Costs and Choice for Investors
Brokers and advisors in the field say it does not cost investors more to work with an advisor who is a fiduciary than with a broker operating under a suitability standard, and that a fiduciary duty for brokers would not reduce product or service choice for investors.
- 82% of respondents say it does not cost investors more to work with fiduciaries than brokers when all costs to the investor are considered, up from 74% in 2011.
- 72% of respondents indicate a fiduciary duty for brokers would not reduce product or service choice for investors, up from 69% in the 2011 survey
- 72% of respondents say a fiduciary standard of care would not price some investors out of the market for advice, up from 67% last year,
These findings suggest a dichotomy between the attitudes of brokers and advisors in the field and broker-dealer and insurance executives. SIFMA, NAIFA, and the Financial Services Institute have argued against extending the Advisers Act RIA fiduciary standard to brokers, claiming such a standard would entail higher compliance costs, disrupt investor access to advice or products and result in higher costs to end investors.
In the field, however, the responses to the survey (see below) indicate that many brokers say they already consider themselves to be in a fiduciary relationship with their clients, regardless of whether they feel supported to do so by their home offices.
The majority of brokers and advisors—63.4%—said they already have a fiduciary relationship with their clients, while only 7.2% say they do not. However (see below), 21.5% of respondents indicate they have a client base in which “some are RIA-fiduciary relationships and some are BD-suitability relationships.” Eight percent of advisors noted: “For some clients I have both a fiduciary relationship and suitability relationship.”
More firms are supporting the brokers and advisors who want to have fiduciary relationships with clients or customers: 58% indicated that their firms have compliance and documentation support for the fiduciary standard, and 29.4% offer support for both fiduciary and suitability, while just 12.4% offer support only for the suitability standard.
Compliance support goes hand-in-hand with a demographic shift away from registration solely as a broker to dual registration or RIA/IAR status. Survey participants were closely divided as far as current registration: RIA/IAR 54.5%, while a total of 45.5% said they were registered representatives or dually registered advisors. But RIA/IARs outnumber registered reps by more than five-to-one, while dually registered advisors outnumber registered reps by a bit less than four-to-one.
Separating Advice From Sales
The vast majority of participants indicated there should be clear differentiation between product providers and advice providers, and that titles such as advisor, consultant and planner imply that a fiduciary relationship exists.
- 87.3% of respondents say there should be clearer differentiation between product providers and advice providers, up a tic from 86.7% last year.
- 72% believe the titles “advisor,” “consultant” and “planner” imply that a fiduciary relationship exists, up from 69% last year.
The Knowledge Gap
How important do brokers and advisors think fiduciary advice is to investors? According to survey participants, very important. While there is debate over how effective disclosures are for investors, and even research that indicates that disclosures without fiduciary advice could actually harm investors, there is broad agreement that disclosures alone are not enough— the advice has to be in the client’s best interest. In part this is because of the “knowledge gap” between the professional and the ordinary individual, in any profession, whether it is financial services, lawyer-client or doctor-patient.
- 81% of respondents say disclosures alone are not sufficient to manage conflicts, a finding consistent with the 2011 survey
- 67% of respondents believe that ordinary investors cannot overcome the “knowledge gap between professional advisors and investors regarding investments and financial services”
- 85% of respondents say that this knowledge gap makes fiduciary advice much more important for ordinary investors
In future postings on the Fiduciary Survey home page, we will relate the findings of the 2012 survey on what respondents think about possible changes in the regulatory scheme for advisors, including the Department of Labor’s proposed redefinition of fiduciary for retirement accounts, and the overall trends suggested by the findings.