More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- 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.
Scott Curtis, president of Raymond James Financial Services, raised an interesting question when he stated in an AdvisorOne interview that while he supports the fiduciary “concept,” he cannot support the fiduciary standard because the standard “hasn’t been defined to the FA level.”
This is a curious remark as the principle-based fiduciary standard has been articulated through seventy years of court cases and SEC opinions—as a principle-based standard. Take the example, as Scott Curtis does, of the issue of conflicts of interest.
What does the Investment Advisers Act require when a material conflict cannot be avoided and must be managed in the client’s best interest? Curtis notes the conflict must be disclosed to the client, but disclosure alone is insufficient. There is more. A material conflict puts a greater duty on the advisor. The advisor must also receive informed consent from the investor: i. e.: consent that is intelligent and independent. This consent means the investor understands the nature of the conflict and the actual or potential harm it might pose. Finally, the advisor should only proceed with the transaction if he or she can mitigate or manage the conflict to be able to determine the transaction is in the best interest of the investor.
This duty is articulated in the SEC Arlene Hughes case, and two points deserve special mention. First, the advisor is responsible for ensuring the investors’ best interest is upheld. The SEC was explicit in noting that it is the investment advisor who is held accountable for assuring that his or her client understands the nature of the conflict and the risk or harm that it imposes. On this point there is no ambiguity.
Further, and this gets to the heart of the strength of the fiduciary standard, the SEC notes there can be no “hard or fast rule” for addressing material conflicts, because the duty adjusts according to the needs of the particular client. The greater the gap of knowledge of the client about the potential harms associated with the conflicted recommendation, the more stringent the fiduciary duty. This principle means, of course, a “one size fits all” disclosure regime is suspect on its face of fiduciary breach for the simple reason that all clients are not equal in their investing knowledge.
This presents a key question (or two) for RJFS. Does RJFS agree a new uniform standard should abide by the principles set out in Hughes? Does RJFS agree that its dually registered brokers, when operating through their RIA today, should abide by these principles?
In his remarks to a standing room crowd at RJFS’ national conference, RJFS Chair Dick Averitt is reported to have embraced the fiduciary standard because, in part, of its mandate to serve society at large, as attorneys and medical doctors are obliged to do. Further, Averitt related how early in his career he came to the realization he was more motivated by helping clients than he was by making money, and that changing how he approached investors consistent with this realization was instrumental to his future success.
Let's hope as Averitt leaves the day-to-day operating decisions of RJFS that the Averitt Principle remains in place.