More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Fiduciary issues pop up in the oddest places. I was visiting an open house recently where the selling realtors handed me a brochure mandated by the state of New Jersey explaining who realtors represent when a homeowner is buying or selling a house. “We can represent the seller,” the female realtor explained, “or we can represent the buyer.” Either way, she said, the realtor has a fiduciary responsibility. Oh, the realtor can also represent both parties—the buyer and seller—in the transaction. “So how do you juggle being a fiduciary to the seller and the buyer at the same time?” I cheekily asked. The male realtor said something in reply to my question that didn’t make any sense, and I didn’t pursue the topic—after all, I was there to look at a house, not parse the niceties of a fiduciary standard.
Harold Evensky has been an early and fervid proponent of having one fiduciary standard for all advice givers. As part of the Committee for the Fiduciary Standard and the Institute for the Fiduciary Standard, our cover subject this month said he has become “fairly jaundiced about Congress or the regulators doing anything” about imposing one fiduciary standard. One of the problems with the issue, he said, citing his Committee and Institute work and his many visits to lawmakers and regulators, is that “you have to demonstrate that something bad is happening” when an end client is not served under a fiduciary standard. “It’s not a Madoff scam, it’s nickel and diming; we’re not talking about big dollars,” so the regulators and legislators don’t see the significance or the urgency.
However, Evensky says that “clients have to protect themselves,” so that’s why “we’ve come up with the mom and pop fiduciary oath” and are encouraging clients “to get their advisors to sign it.”
What’s that oath? It’s simple:
I believe in placing my clients’ best interests first. Therefore, I am proud to commit to the following five fiduciary principles:
I will always put my clients’ best interests first.
I will act with prudence; that is, with the skill, care, diligence and good judgment of a professional.
I will not mislead clients, and I will provide conspicuous, full and fair disclosure of all important facts.
I will avoid conflicts of interest.
I will fully disclose and fairly manage, in my clients’ favor, any unavoidable conflicts.
If the client’s advisor won’t sign, Evensky argues that “you owe it to yourself to ask why you would trust your financial future to that advisor’s care.”
I wonder, though, about the amount of money that clients are losing and the urgency involved. Another proponent of the fiduciary standard, John Bogle, showed how reducing a mutual fund’s expenses through index investing can have a major impact over time on how much money the end investor will wind up with (see Bob Clark’s column on Bogle on page 45).
After all, you advisors are advising your clients on how to succeed in the long term. Why wouldn’t you put those clients’ interests first? The State of New Jersey mandates it for realtors, but for advisors?