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.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
As the year comes to a close, the issue of trust has exploded onto the national screen. The meaning and impact of ObamaCare—and how it was promoted by the president—has, for many, become an issue of trust. Advisors should take note. Our own issue of trust calls for attention and action.
The research suggests investor distrust spawned by the financial crisis persists, is widespread and is, in all probability, already influencing the markets. This is not (publicly) questioned. What seems to be in question is what, if anything, advisors need to, can or should do about it. There's far been too little industry discussion or action addressing the implications of the public viewing advisors' honesty and ethical standards (however unfairly) as they do Wall Street bankers'.
A paper from the conservative think tank, the American Enterprise Institute, concludes that when it comes to Americans’ views of Wall Street banks, "The consensus is that many of these firms are not ethical or concerned about the well-being of the country." Industry consultant Chip Roame puts a sharper edge on the point of what the public believes: "The whole industry is evil...you are lumped in with Madoff."
For many experts, there's no mystery about what brought on these sentiments, and what the profession needs to do to win back investor confidence. What's also clear are the factors that did not significantly contribute to investor distrust, such as investment performance, products or technology snafus.
Robert Fronk, the author of the Harris Reputation Quotient Survey, which annually measures the reputations of the most visible corporations, makes clear what is important to investor confidence, "One thing the public is screaming loud and clear about financial services: Be more sincere. Be more honest. Be more transparent."
There has been some industry discussion. A few 2013 examples include: Wealthmanagement.com editor David Armstrong, who recently recited some industry developments that he suggested contributed to investor distrust and then observed, "Yet too often it seems as if the industry isn't really concerned with building client trust at all."
Elsewhere, Paladin owner Jack Waymire reported the results of a survey of RIAs on how they disclose their compensation and expenses. Noting that only 14% of RIAs volunteer "complete pricing" to clients, he chided RIAs for their lack of transparency. Advisor Mark Mensack has written a number of thoughtful pieces on ethical and unethical practices. Consultant Don Trone recently wrote a piece squarely fixing deceptive actions and communications as key reasons for investor distrust. College professor Ron Rhoades has written regularly on the overriding need for an advisory profession strictly defined by a genuine fiduciary standard.
These are good pieces and helpful. Yet a broader discussion of the trust imperative for the advisory profession—and the appropriate subsequent concrete actions—is needed. CFA Institute has launched such a discussion and some key actions. Its Future of Finance campaign is a major initiative aimed at its charter holders undertaken to restore trust in the capital markets and the advisory profession. It includes a Statement of Investor Rights and a list of 50 ways CFAs can help restore trust. CFA CEO John Rogers speaks of establishing a firm culture "that puts clients’ interest first, with no exceptions. Be transparent. Demonstrate integrity. Communicate early and often."
Straightforward enough and on point. But more efforts are needed. The climb is steep. Not all industry participants seem to be on board. A CFA Institute and Economist Intelligence Unit global report, A Crisis of Culture: Valuing Ethics and Knowledge in Financial Services, found resistance to higher ethical standards among industry executives.
The report notes, "Executives struggle to see the benefits of greater adherence to ethical standards. While respondents admit that an improvement in employees’ ethical conduct would improve their resilience to unexpected and dramatic risk, 53% think that career progression at their firm would be difficult without being flexible on ethical standards."
Serving clients' best interest. Avoid conflicts. Be loyal, honest and transparent. Act with integrity. Communicate clearly and accurately.
These are hallmarks of a profession that advisors need to proudly practice and publicly discuss, defend and advance. And to do so, as John Rogers notes, “With no exceptions.” The key question: Is David Armstrong correct when he writes, “It seems as if the industry isn't really concerned with building client trust at all."