More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- 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.
This year, trust lawyer, CFP and pension advisor W. Scott Simon won the Tamar Frankel Fiduciary of the Year Award from the Committee for the Fiduciary Standard. Judging by his monthly “Fiduciary Focus” column on Morningstar Advisor alone, it’s easy to see why: month in and month out, Simon delivers the most knowledgeable, articulate and creative commentary on the fiduciary debate anywhere. His April 5 installment “The Great Compromise to the Fiduciary Debate,” for instance, may offer the best solution yet to the broker/advisor regulation conundrum. But if you’re like me, it will take a bit of considering to warm up to it.
Like many great ideas, Simon’s is a simple one: with the brokerage and investment advisory communities squabbling over using their existing standards to “harmonize” the regulation of retail financial advice (and digressing into lame arguments of level playing fields, business model neutrality, and ‘access’ to advice), why not cut the baby in half by choosing a third standard from outside of either industry? Happily, just such a standard can be found in the separate but related field of regulating pension advice: the fiduciary standard of care as mandated under ERISA.
“I have long believed that the best way to resolve this fight lies in subjecting both RIAs and BDs to the ‘sole interest’ fiduciary standard of care found in [ERISA],” Simon writes, concluding that “In one fell swoop, ERISA’s standard would level that proverbial playing field for all concerned.”
What’s more, Simon’s Solomonic compromise’has other advantages. As an outside standard, it’s got no dog in the broker vs. advisor debate, yet the ERISA standard is a far sight better than starting from scratch: It comes with a nearly 40-year plug-and-play legal history of test cases, rulings and interpretations. Best of all, it appeases the misguided crowd who want to beat RIAs over the head with the misdeeds of FINRA leader Bernie Madoff and the ‘need’ for tougher advisor regulation by elevating the advisor standard from a client’s ‘best’ interest, to ‘sole’ interest.
It’s a seemingly small change, to be sure, and yet switching those four simple letters would eliminate most of the conflicts of interest that currently plague retail clients who are desperately seeking objective financial advice today. With one simple stroke of the keyboard, it removes the confusion over whom an advisor works for, which ‘hat’ they happen to be wearing at any particular time and where their sole loyalty lies.
“This compromise has the merit of disturbing both sides in this fight because it would change the existing standard of care under which each operates,” writes Simon. Brokers “…would be lifted from the suitability standard all the way up to ERISA's ‘highest known to law’ standard… [And] no longer would an RIA be allowed under the ERISA standard to, for example, ‘double dip’ by (1) receiving a fee on the advice it provides to its clients and also (2) earning commissions from the RIA's brokerage firm, bank, or custodial affiliate as a result of the trades it directs them to make to implement that advice.”
Why would the securities industry go for such a compromise? They wouldn’t. If fact, they’re still fighting like badgers against the DOL extending the same ‘sole interest’ fiduciary standard beyond 401(s) to IRAs (go figure). The beauty of Simon’s proposal is that they don’t have to. He’s taking a page from the current Administration’s playbook: Appear like the good guy by offering a compromise to your opponents (that you know they’ll never agree to), but one that looks reasonable to outside observers who will ultimately decide the issue—particularly to the majority who aren’t really paying attention anyway.
Nobody’s not really paying attention to the fiduciary issue more than the Congressmen who are debating the issue. To further sway them, Simon’s compromise takes one of SIFMA’s and the SEC’s primary red-herring concerns off the table: business model neutrality. Moreover, it’s the height of reasonableness. Why shouldn’t today’s and tomorrow’s retirees have the same protections in their brokerage accounts as they do in their retirement accounts? It’s the perfect out for bored politicians who simply want to get this fiduciary thing off their desks, and get back to fleecing the public. If Scott Simon hadn’t already won his Tamar Frankel award, he should have gotten it for this idea, alone.