More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
The other day, I was reading Knut Rostad’s May 14 press release on the Institute for the Fiduciary Standard’s new initiative to write “Best Practices Standards” for financial advisors and investment advisors (see Melanie Waddell’s May 15 ThinkAdvisor story). There’s also an accompanying white paper on those proposed practices from the Institute about which I’ll write more in future blogs. During that initial read-through, however, I found myself wondering: “Why is this necessary?” Don’t get me wrong: I don’t doubt that fiduciary best practices are necessary. My question is: why don’t they already exist?
Of course, there are those who would argue that these best practices already do exist: At the CFP Board, at NAPFA, or both. Yet while NAPFA certainly comes closer, neither really sets the bar high enough. The Board impotently declares that CFPs “have a fiduciary duty,” and then sidesteps the details, while NAPFA offers more guidelines,
As I ponder this question, it occurs to me that the answer may lie in the history of financial planning itself—which may also explain why few people will pay directly for financial planning (and no, it’s not due to lack of proper education) and why financial planning has been used as a "powerful marketing tool" for decades.
It seems to me there is an underlying reality here that the investing public is communicating, about which many "financial planners" appear to be in denial, The founders of "financial planning" made a mistake: they focused on the wrong thing. Financial planning is just one part of the suite of services needed to help clients reach their goals and meet their financial obligations. The others include: risk management, asset management, financial independence, a fiduciary duty, compensation solely and directly by the clients, and professional standards and practices.
While it's fair to say that most clients don't understand the need for many of these elements, it's not fair to say that the emphasis on asset management (as shown by their willingness to pay for it) is misplaced. The hard reality is that most people will not be able to "retire" or meet other financial obligations (kids, grandkids, parents, etc.) without growing their savings through prudent investing. While sound financial planning can make their investing more efficient, it’s at best the roadmap, not the car.
Yet the more narrow focus on the “process of financial planning” (rather than the bigger client-oriented picture) has in large part prevented the “financial planning profession” from actually creating a profession, and thereby eliminating the extensive conflicts of interest of many securities-licensed CFPs: public confusion over advice vs. sales created by a “two-hat” practice of securities-licensed CFPs, and "financial planning" used as a "powerful marketing tool."
I fully recognize that back in the day, comprehensive financial planning was a major leap forward for meeting the needs of retail clients. It just didn’t go far enough. We are now in the midst of a number of efforts—the Dodd-Frank Act, fiduciary steps at the DOL and the SEC—that are attempting to correct these omissions and broaden the client responsibilities of advisors. Yet each of those initiatives is little more than a small step toward establishing the client-centered profession that today’s financial consumers need and want.
And that’s why we need best practice standards for financial advisors. If done right, they will provide a comprehensive basis for a real profession of client-centered advisors—not just a process that may, or may not, be used in the clients’ best interests.