More On Legal & Compliancefrom The Advisor's Professional Library
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- 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.
The debate on whether all financial advice givers—including registered representatives of broker-dealers—should be required to operate under a fiduciary standard has been long and contentious.
Many groups have responded to the SEC’s March 1 request for information (RFI) on the topic — one of the key issues still unresolved in implementing the Dodd-Frank Act.
Among those in favor of a single fiduciary standard for all advice givers is the Investment Company Institute. It said in its comment to the SEC: “ICI continues to support the SEC staff’s 2011 recommendation that the SEC adopt a fiduciary standard of conduct for broker-dealers when they are providing personalized investment advice about securities to retail investors that is no less stringent than the fiduciary duty that applies to investment advisers.”
The FPA, NAPFA, NASAA, the CFP Board, the IAA, AICPA, Fund Democracy and the Consumer Federation of America filed a jointly signed comment which said in part: “We support the SEC staff recommendation in its Section 913 Study to adopt parallel rules under the Advisers Act and the Securities Exchange Act of 1934 establishing an overarching fiduciary duty that is identical for brokers and advisers, but only if, as the Dodd-Frank Act mandates, it is no less stringent than the existing standard under the Advisers Act.” The IAA filed a separate comment letter, in which it wrote: "We continue to maintain that all persons providing investment advice about securities to clients (regardless of the level of the client’s sophistication) should be subject to the same high standard of care--the well-established fiduciary duty standard under the Advisers Act," but also expressed its concern that the SEC "appears to be approaching its initial consideration of the uniform standard of conduct and other regulatory harmonization from the perspective of applying broker-dealer rules to investment advisers, while only sparingly mentioning the possibility that investment adviser regulation should apply to brokers that provide advice. We would oppose wholesale application of “check-the-box” broker-dealer regulation to investment advisers."
The Institute for the Fiduciary Standard, in its comment filed today by Knut Rostad (right), concludes that “The SEC is poised to neuter the fiduciary standard. The RFI assumptions categorically reject basic fiduciary principles and, instead, set out the basis for a lower commercial sales standard. If the SEC proceeds to embody these assumptions in rulemaking, it would reject decades of precedent, research findings and expert opinion.”
Among those who have argued against extending the SEC's current fiduciary standard to brokers are the Financial Services Institute (FSI), which in a comment on another Dodd-Frank implementation wrote: “we urge the SEC not to lose focus on the important need of harmonizing regulatory requirements as well, as it progresses forward on the fiduciary duty.”
The National Association of Insurance and Financial Advisors (NAIFA) argued that “the imposition of a fiduciary standard on registered representatives would likely result in a shift from middle- to higher-income clients, increased costs, and limitations on the product options offered.”
Individuals of note who have filed comments with the SEC on the issue include John Bogle (left), who said, “What today's 'new' mutual fund industry needs, more than anything else, is a clear affirmation of the fiduciary standard that was specified in the 1940 Acts.”
Luke Dean, a professor of financial planning at William Patterson University in New Jersey, said in his comment letter: “In 1940, when the integrity and ethical standards of an individual "professional" were much higher than they are today... our forefathers had the foresight to create the Investment Advisers Act of 1940, which in effect, created a fiduciary requirement for any "advisor" to actually give advice that is in the best interest of the consumer.”
But what about individual advisors? What is their opinion on a fiduciary standard? Here is a compilation of RFI comments made by advisors, most of whom are registered investment advisors.
Evensky & Katz
Coral Gables, Fla.
Although I also understand the reluctance to impose unnecessary and potentially costly regulatory standards, I believe that this framing, 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 Family Firm
My letter addresses just one aspect of the fiduciary duty, the obligation to disclose all material information, including the seller’s “financial interest” in a particular transaction. In focusing on this issue, I do not intend to imply that disclosure alone would satisfy the fiduciary duty. On the contrary, an adviser’s fiduciary obligations are far more extensive and include, first and foremost, an obligation to act in the best interests of the client.
However, disclosure of financial interest will take on increased importance if brokers and dually registered advisors are deemed to be fiduciaries…retail customers of brokers, dealers and dually registered investment advisers suffer a critical disadvantage in the advisory relationship because the broker-dealer or dually registered adviser is under no obligation to disclose his/her “financial interest” in the securities and insurance transactions1 that the customer enters into as a result of the advice received.
Jonathan Krasney, CFP
A single fiduciary standard is necessary to prevent further confusion in the marketplace. Either a professional is acting in a fiduciary standard, or he or she is not. Many definitions have been confused by the public surrounding the term financial advisor, and as such the public is not sure who is acting in a fiduciary capacity and who is acting in a Registered Representative capacity under the suitability standard, as opposed to the "best interest" standard required of a fiduciary. To further blur the lines will only further complicate the public’s confusion. Either a consumer is dealing with a professional in a ficudiary capacity or not. Having multiple standards will only further the confusion and further blur the lines separating the two standards, in my view.
Maureen Gaare, Chief Compliance Officer
Solana Beach, Calif.
If you decide to develop a uniform standard of care and harmonize the regulations (especially if the regulations you end up with are [predominantly] those regulations currently applied to broker-dealers) it is going to have a negative impact on consumers.
Geoff Gilbert, CFA
One, standardized fiduciary duty — as written in the 1940 Investment Advisors Act, needs to be ENFORCED...not rewritten, not watered down
Remove the broker exemption
You have lost the trust of the general public. Without the higher standards, we will lose them forever.
I understand that SEC is looking for data and information on this topic, but I am afraid such data and information are largely kept by entities which do not wish to be regulated by the Dodd-Frank Act. I personally know several elderly people (including some family members) who lost 50% of their savings in 2008 by holding concentrated equity-only portfolios, which had been recommended by their brokers. These elderly people consider themselves still in the middle class but in reality, they are broke and depend on their children's financial supports. The brokers they used were their friends or friends' relatives or friends' friends. It is clear that they knew nothing about the difference between the brokers and investment advisors or fiduciary duties. After they lost almost half of the retirement savings, they were told by the broker/friends that they could still sell their houses to meet their spending requirements, which was hard to do for the people in their 80s. It is clear that (1) public education about fiduciary duties is lacking and (2) more training about fiduciary duties is required for anyone who claim to be a financial advisor. Current disclosure rules on incentive fees do not sufficiently address the conflict of interests of certain type of financial advisors either.
1. adopting a single, definable, and enforceable standard of care
2. establishing a consistent treatment of all individuals and firms that engage in similar activities
3. applying such a standard when broker-dealers provide personalized investment advice to retail investors
4. a fiduciary level standard that requires the duties of prudence, loyalty, and care for those who provide personalized investment advice
David H. Lindau, CFP, CPA
El Paso, Texas
I have been helping clients solve financial problems for over 50 years. I am a registered representative of a Registered Investment Advisor. I can tell you that most of my clients do not understand the difference between "suitable" and "in their best interest" (even though I have tried to explain the practical differences). Since many employers have stopped looking out for their employees-by dropping defined benefit plans-it is more important than ever that "suitable" be replaced by "in the best interest" for all and any of us that help people with financial plans and products. Please drop the double standard. Too many people are being taken advantage of.
Michael O. Babin Sr.
Babin Financial Services
New Orleans, La.
Since reg reps do not act in a fiduciary capacity, they should come under tougher rules to measure up to RIAs and CFPs.
John M Smartt Jr., CPA
Registered Investment Advisor
A uniform fiduciary standard would:
1. simplify oversight by the SEC and state regulators
2. reduce the extent of doubt/uncertainty in the minds of investors and
3. provide investors with better service (and probably at a lower cost).