More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- 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.
One would think, said Barbara Roper, director of investor protection for the Consumer Federation of America, that “the near destruction of the global economy” would have ended the regulation/no regulation debate.
However, when it comes to our country’s financial system, nothing has changed, according to Roper, and despite a series of successive disasters -- the bursting of the tech-stock bubble, the accounting and analyst scandals, the mutual fund scandals and finally, the devastating financial crisis, whose after effects are still being felt in certain quarters – it’s pretty much business as usual on Wall Street.
Granted, in the immediate aftermath of the 2008 crisis, the time frame in which the Securities and Exchange Commission should have completed its regulatory overhaul may have been unreasonable. But Roper also believes that the momentum for change petered out quite quickly, and any move for what she views as much-needed regulatory change has ground to a halt, leaving the financial system stuck exactly where it was.
The sad part of that, she said, is that nothing has changed for the people on the street.
“The average person does not have a clue as to what is appropriate regulation for derivatives or how credit rating agencies should be regulated or what we would need to make sound decisions about the asset-backed securities that were so disastrous,” she said. “But the average person is, unfortunately, the collateral damage of these kinds of crises.”
Today, many investors who were badly burned in the crisis are still reluctant to get back into the fray, but cultivating their trust is of the greatest importance, since “the markets depend on investors to provide capital at a reasonable cost,” Roper said.
For their part, financial advisors are doing a stellar job of regaining clients’ trust and confidence, cultivating these for the long term, she said. Still, in her view, their efforts are more or less futile in the absence of macro, system-wide financial sector reform and regulation and, more particularly, regulation that actually regulates the advisor-client relationship as “a relationship based on trust.”
“We had a clear division between brokers and advisors, but the SEC chose to erase that line and now, going back and dealing with that is taking an unreasonably long time,” she said. “The broad consensus is to apply a single fiduciary standard to all brokers and advisors alike, but [the regulators] still hesitate to act and bring this one to the table. Now, even a sophisticated investor does not know whether their financial planning professional is an advisor or a broker, and they won’t know until the regulation is changed.”
Roper serves on the SEC's Investor Advisory Committee. She is the 1991 recipient of the National Association of Personal Financial Advisors' Distinguished Service Award, the 1992 recipient of a Distinguished Service Award from the North American Securities Administrators Association, and a 2004 recipient of Consumer Action’s Consumer Excellence Award.
(Check out Investment Advisor's full IA 25 for 2014 list on ThinkAdvisor.)