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.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
As the debate continues over extension of the fiduciary standard to brokers who advise retail investors and the SEC and Department of Labor prepare economic or cost studies as a next step before making final determinations on their separate fiduciary rulemakings, fi360 and AdvisorOne have jointly conducted their second annual survey of investment advisors’ and brokers’ attitudes about the fiduciary standard.
Fielded in March and April of 2012, the survey was completed by 380 advisors from across the spectrum of advisor business models and affiliations. The survey not only sought advisors’ opinions on the fiduciary standard but also gauged their understanding of what such a standard means now, or would mean, to their businesses.
In part one of this three-part blog series on the survey’s findings we recalled that investors don’t understand the differences between brokers and investment advisors and that the majority of advisors believe that extension of the fiduciary standard to brokers would help restore investor confidence.
Key findings in the first report on the survey also pointed out that, contrary to what some industry groups might be saying formally on behalf of both independent broker-dealer and wirehouse brokers, registered reps and investment advisors in the field believe that extending the fiduciary standard would not cost investors more for advice, limit access to advice or products nor price investors out of the market for advice.
In part two below, we’ll discuss participants’ attitudes about pending or potential regulation, and assess their stated beliefs about some of the myths surrounding the implementation of those regulatory changes.
For instance, a majority of survey participants agrees with the somewhat controversial proposal (temporarily withdrawn) to extend the stringent ERISA fiduciary duty to more advisors. This majority extends even to the question of fiduciary duty to those advising on money coming out of 401(k)s and IRAs—long considered to be an area of vulnerability for many investors. Here we have highlights of this part of the survey:
Overall Fiduciary Relationship
When on the survey we asked, “Do you have a fiduciary relationship with your clients?,” the vast majority of independent RIAs and IARs said they do have a fiduciary relationship with all or nearly all of their clients, as you would expect for a group regulated under the Investment Advisers Act of 1940. But for registered reps and dual registrants, most said they have a fiduciary relationship with all (38%), or some (37%) of their clients, and relatively few reported they had no client fiduciary relationships. A small number of registered reps and dual registrants (14%), reported they have both suitability and fiduciary relationships with some clients.
An Even Tougher Standard: ERISA
Here is where it really gets interesting. The ERISA standard is arguably even more stringent than the ’40 Act fiduciary standard. Yet when we asked in the survey, “Do you agree in concept with the Labor Department's plan to propose a rule that would redefine "fiduciary" and expand the number of advisors who are considered fiduciaries under ERISA?.” 70% of respondents—including registered reps and dual registrants—agree in concept with the rule that would make them a fiduciary. Of dual registrants and registered reps, 63% agree, while 76% of RIA/IARs agree.
In addition, 68% of all survey participants agree that the same fiduciary standard that applies to 401(k) plans should also apply to advice on IRA accounts. Within the overall group, 80% of RIA/IARs, 57% of registered reps and 54% of dual registrants agree.
There may be no area of advising individual investors where there is greater vulnerability for investors—and need for advice that is fiduciary—than distributions from retirement accounts. When we asked, “Should the fiduciary standard apply to advice to investors on distributions from 401(k) or IRA accounts?,” 79% agreed. That percentage included 68% of registered reps and dual registrants, and 88% of RIA/IARs.
The DOL has also required that retirement plan sponsors provide fee disclosures to plan participants by July 1. Most survey participants say they are ready: 71% say they are “sufficiently prepared to provide 408(b)(2) compliant disclosures by the July 1, 2012 deadline.” More dual registrants, 78%, than any other registration category say they are prepared to provide 408(b)(2) disclosure by the July 1 deadline, while 71% of RIA/IARs, and 50% of registered reps say they are prepared.
The approach to conflicts of interest and disclosure is an important difference between the BD suitability standard and the fiduciary standard. The ‘40 Act fiduciary approach is to avoid conflicts, and where unavoidable, manage in the investor’s interest—and disclose all material conflicts. The suitability approach is to disclose, but there is no duty to avoid conflicts of interest. Even so, when asked, “Are disclosures alone sufficient to manage conflicts?” the vast majority of respondents, 81%, across all types of advisors, agrees: disclosures alone are not sufficient to manage conflicts. Broken out, 84% of RIA/IARs, 80% of registered reps and 76% of dual registrants agree that disclosures alone are insufficient.
In addition, 70% noted that the primary role of disclosures in their practice is both “informing investors of products and conflicts so that they can make the best decisions,” and “informing investors of the rationale for your recommendation and advice.”
Some of the familiar myths that surround the potential extension of the ’40 Act fiduciary standard to brokers, as in Dodd Frank, seem to be eschewed by those who participated in the survey.
“Do you believe the fiduciary standard requires advisors to only recommend the lowest cost products and services?” ‘No,’ was the response by 93.8% of respondents.
“Do you believe the fiduciary standard of care requires ongoing monitoring of clients’ portfolios or is this ‘scope of engagement’ issue to be agreed on between client and advisor?” Overall, 54% say ongoing monitoring is required, while 46% say it is a scope of engagement discussion.
When responses were broken out according to registration, RIA/IARs were nearly evenly divided over whether the fiduciary standard requires ongoing monitoring of client portfolios or if this was a ‘scope of engagement’ issue to be agreed upon by client and advisor. Registered reps as a group, 69%, believe the fiduciary standard requires ongoing monitoring, followed by 56.4% of dually registered participants.
“Do you believe that receiving commissions and/or recommending proprietary products is prohibitive to acting as a fiduciary?” Overall, 53.5% responded ‘No,’ that commissions or recommending proprietary products is not prohibitive. Dodd-Frank specifically noted that commission compensation and recommending proprietary products were not prohibited under fiduciary requirements. However, it did give the SEC the ability to prohibit certain industry practices if they were deemed harmful to investors.
There appears to be a thirst for fiduciary knowledge among advisors. When asked, “Do you believe that advisors are adequately knowledgeable and trained to practice under the fiduciary standard?” overall, 74% said ‘No.’
“Do you believe investors understand the differences between brokers and investment advisers?” Overall, 97.2% say investors do not understand the differences between brokers and investment advisors
“There is a large gap in the knowledge base between professional advisors and that of individual investors regarding investments and financial services. Can the ordinary investor bridge this gap?” Two-thirds of all surveyed believe that ordinary investors cannot bridge the knowledge gap they have with the advisors. While 66.7% of RIA/IARs, and 64.1% of dual registrants agree that investors cannot bridge the knowledge gap, an even higher percentage of registered reps, 75.9%, believe this is the case.
“Does this 'knowledge gap' make fiduciary advice much more important for ordinary investors?” While 85% overall believe that this knowledge gap makes fiduciary advice much more important for ordinary investors, the breakout by registration on this survey question shows more variation. A much higher percentage of RIA/IARs—93.1%—than dual registrants—76.9%—or registered reps, —72.4%— believe that the knowledge gap makes fiduciary advice much more important for ordinary investors. This may be linked to the requirement of the fiduciary standard that is already in place for RIA/IARs. Still, it is the clear majority belief across all types of advisors.
“Is there room in financial services for the suitability standard to apply to sales only (investment information only, no personalized advice, all costs disclosed) and the fiduciary standard to apply to advice and/or money management?” A majority, 63%, says there is room for suitability in sales only (investment information only, no personalized advice, all costs disclosed) and for the fiduciary standard to apply to advice and/or money management
“Which of the following ways are best to clearly differentiate fiduciary versus non-fiduciary roles to investors?” Participants were given three choices for yes or no answers:
- Disclosure—85% say ‘Yes.’
- Separate firms with clearly differentiated purposes—64% say ‘Yes.’
- Titles—59% say ‘Yes.’
The Best Fiduciary Enforcer?
At a time when the issue of an SRO for advisors has returned to the front-burner in the re-regulation debate, the next question in our survey seemed particularly timely.
“Which regulator should enforce the fiduciary standard if extended to brokers who provide advice to investors?” Overall, 41% believe the SEC (as opposed to FINRA or an SRO) should enforce the fiduciary standard of it is extended to brokers, while 33% believe it should be FINRA, and 25% would rather see a separate SRO regulate advisors under the fiduciary standard.
While it may not be evident from some of the louder voices in Congress or among Wall Street lobbyists, there is an argument to be made that in the field, advisors, brokers and dual registrants who practice with clients every day are clearly listening to those clients, and thinking about the regulatory questions at hand in thoughtful ways. As clients become aware of differences in types of firms and advisors, they are making their own choices—and so are the individuals who advise them.
Next week, we will report on the key overall trends emanating from the AdvisorOne-fi360 survey.