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.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
High-profile planner Harold Evensky says the Securities and Exchange Commission, as part of its fiduciary rule, should require anyone providing personalized advice to provide a “mom and pop” statement describing the advisor’s responsibilities.
In response to the SEC’s March 1 request for data regarding the costs and benefits of the current standards of conduct for broker-dealers and advisors, Evensky (left) told the agency in his March 8 comment letter—one of four the agency has received thus far—that the “Achilles Heel” of the current regulatory system is “the public’s belief that all professionals providing investment advice place the client’s best interest first, coupled with an inappropriate allocation of responsibility; i.e., ‘where the buck stops.”’
Under the suitability standard that brokers adhere to, “the buck stops with the client. Said differently, the advisor’s duty of loyalty is to the firm, not the client,” Evensky said. “Under a fiduciary standard it stops with the adviser, whose duty of loyalty is to the client.”
Evensky told the agency that while he understands the agency’s “reluctance to impose unnecessary and potentially costly regulatory standards,” he believes that being “focused on protecting existing business models instead of protecting the public, results in a myopic focus that will leave the investing public at a significant disadvantage.”
The criterion for determining when the “Mom and Pop” statement would be required is what Evensky called the “you” standard.
According to Evensky, such a standard would work like this:
If a prospective client calls an advisor and says, “I would like to buy xx shares of YYY.” No problem, the advisor would be subject to a suitability standard.
If a prospective client calls an advisor and says, “I’m thinking of buying YYY, what does your firm think of the stock?” Again, no problem, the advisor would be subject to a suitability standard.
However, if the prospect then says, “That sounds good, do you think I should buy YYY?” and the advisor responds “yes, I think YYY would be a good investment for YOU,” he or she would then be held to a fiduciary standard and required to provide the client with the Mom and Pop commitment.
As soon as an advisor uses the term “you” in a recommendation, he or she is no longer acting under a suitability standard, Evensky says. “Trust is absolute; therefore, once a relationship of trust has been established and personalized advice has been provided; all subsequent business would be under a fiduciary standard.”
In summing up the current regulatory problem with BD and advisor regulation, Evensky said that the risk to the average investor in the current regulatory environment is not a Madoff scheme “that fleeces a relatively few investors of millions or billions of dollars.” Rather, he said, “it is a system that allows financial professionals to position themselves as ‘trusted advisers’ and, as a result of that trust, provide recommendations that, while neither fraudulent nor unsuitable, may well be more expensive than an available alternative investment from the same firm. The result may well be billions of dollars in excess cost paid by millions of investors.”
So how do advisors themselves feel about a stronger fiduciary standard for all advisors, and how are they “putting clients first” absent a single standard? We invite you to participate in the third annual fiduciary survey sponsored by AdvisorOne and Fi360.—Ed.