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.
- 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.
As you may have noticed, it now seems that the securities industry has successfully shifted the focus of the reregulation debate away from a fiduciary standard for brokers (as mandated by Dodd-Frank) and on to the reregulation of investment advisors (as if they are the greater threat to financial consumers; whipping boy Bernie Madoff not withstanding). To get a handle on what all this means for a universal fiduciary standard for retail advisors, I caught up with Knut Rostad, chief regulatory and compliance officer of Rembert Pendleton Jackson Investment Advisors (in Falls Church, Va.), and founder and president of The Institute for the Fiduciary Standard.
“Things don’t currently look all that great for an authentic fiduciary standard for brokers any time soon,” he told me in an interview. “In fact, it looks like the regulators punt. Yet, I don’t think that’s cause for doom and gloom; it seems to me (and to a lot of other folks) that the future of a broad fiduciary standard depends less and less on what the regulators do, and instead is increasingly a function of the advisory profession itself, and what happens with technology. In fact, given everything we see right now, I am very optimistic.”
Knut’s optimism is based on what he deems a “very myopic view” of the current situation by the financial services industry, one that ignores the macro public sentiment. “Do they realize that no one is listening to them?” he asked. “And if anyone is listening, they don’t believe what they hear. The new normal is not just distrust, it’s disgust. The question is whether this is just a swing of the pendulum or a larger trend that has longer-term consequences.”
For Knut (left), the answer is clearly the latter: a long-term shift in public sentiment, which he (and others) equate to what happened to the views of our parents (or grandparents) who lived through the Great Depression of the 1930s. For you youngsters who need a refresher, the virtual collapse of the U.S. (and world) banking system created widespread distrust in large financial institutions in an entire generation that lasted the rest of their lives: enabling the rise of upstarts like Fidelity Investments, Merrill Lynch, and the rest of the retail mutual fund and brokerage industries.
Rostad believes that our recent Great Recession combined with ongoing reports of Wall Street’s bad behavior has led to a similar change in the minds of the current investing public, particularly younger folks, who, like folks 80 years ago, may never regain their faith in ‘the system.’ Rostad argues that “today’s investors have become so disgusted by what they see, they are beyond distrust. Many of them have lost confidence in active investment management, along with the brokerage/advisory system that supports it.”
Consequently, Knut thinks (and it’s hard to argue with him) that today’s investors will increasingly turn away from traditional advisors and the brokerage industry and toward technological solutions offered on the Internet. “The macro data is that Merrill [and the other Wall Street firms are] now losing the argument with the boomers,” he said. “Our kids are more uncomfortable with advisors, period, and are increasingly looking to the Internet as a mechanism to manage their own portfolios.”
While the new public perception of traditional “advice” poses some dangers for independent advisors, it also offers great opportunity—if they can continue to position themselves as the nontraditional, client-centered “revolution” that’s made them the rising stars of retail advice for the past 20 years. Rostad believes that the fiduciary standard will be the key to that positioning. “In order to remain valuable to clients, advisors will have to embrace the strongest fiduciary standard,” he predicts. “And they’ll have to help consumers to see the difference [between them and the many folks whom the regulators will allow to call themselves a ‘fiduciary’]. The role of a profession in creating and upholding their own standards will take on a new importance—led by organizations with the highest standards, and that are outspoken. NAPFA and the CFA Institute come to mind, first. It’s not time for the faint of heart.”
It’s a vision that offers both great challenge and great opportunity to independent advisors. In my view, it’s a tragedy that the CFP Board, with its watered-down standard and broad interpretations of what’s in the clients’ best interests, doesn’t make the list of potential industry leaders. Perhaps the new realities will motivate them to move the financial planning profession into the forefront of independent advice and the fiduciary movement.