More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- The New and Improved Form ADV Whether an RIA is describing its investment strategy in advertisements or in the new Form ADV Part 2, it is important the firm articulates material risks faced by advisory clients and avoids language that might be construed as a guarantee.
I took some time off during the last two weeks, so I’ve gotten a little behind on addressing the comments on my two recent ThinkAdvisor.com blogs: The Case for a New Advisor Designation: ‘Fiduciary-Only' Advisors, from July 30, and Can a ‘Fiduciary-Only’ Advisor Take Commissions?, from August 13. They contain some excellent and interesting points that warrant repeating and comment.
The first one comes from David Sterling, who describes himself as “hybrid advisor (licensed attorney, securities and insurance professional).” David is concerned that I was “not quite certain about how to affix the ‘fiduciary’ label. If I am not mistaken, [Clark] has interchanged the application of the label to financial as well as investment fiduciary advisors.”
While I did use the term “financial advisor” intentionally, I apologize for any confusion that I might have caused by doing so. At the same time, it seems to me this is exactly the same confusion that retail investors are faced with in an industry where “investment advisors” are strictly regulated, while anyone can call themselves a “financial advisor,” regardless of whether they fall under a fiduciary standard, a part-time fiduciary standard or no fiduciary standard. (Part-time fiduciaries being licensed brokers and insurance agents who also wear RIA hats during a portion of their engagement with a client.) In fact, it’s those latter two standards—part-time and no-time fiduciaries—who inspired me to suggest a “fiduciary only” label.
Mr. Sterling goes on to suggest an alternative remedy for this problem: “Maybe all that is necessary is to simply educate investors about the ‘fiduciary’ limitations imposed under the 1940 Act. I, for one, would not want to be held to a standard that holds me accountable for all matters, transactions and guidance considered ‘financial.’”
As an attorney, I can understand his aversion to such as standard. Yet, according to the CFP Board, CFPs are held to act as fiduciaries when they are doing financial planning (which includes insurance, investments, estate planning, retirement planning and college planning) and when they give investment advice they are held to the ’40 Act RIA standard as well. That seems pretty comprehensively “financial” to me.
As for “investor education,” really? The nuances of the ’40 Act and its “broker exemption,” along with all the case law since, and nuances of “scope of the engagement”… well, it’s solutions like these that cry out for a “fiduciary only” designation. Which financial advisors such as Mr. Sterling would be free to ignore.
Next, P Potts, who is normally more insightful, writes: “I think that the term fiduciary advisor would be a redundancy of RIA, which by law has the fiduciary standard built in.” Of course, P Potts would be right if RIAs were RIAs only.
But, again, this is the point: As long as brokers and agents can be “part-time” RIAs for the same client, investors need a way to easily identify advisors who are always on their side of the table, from those who sometimes are legal representatives of their employers, with no such duty to their clients.
Jeffrey McClure elucidated this point better than I did, when he wrote: “I think the issue is highlighted in what a person who receives a commission is officially and legally called,” an agent. If a person is acting as an agent of another person or corporation, then the agent is legally and morally obligated to act in the best interest of the entity for whom he or she is acting as the agent. In essence, an insurance agent is a fiduciary not for the customer, but for the company, by law! Very notably, a person employed as a representative of a broker-dealer is legally an ‘agent’ of the broker-dealer. It is impossible to have fiduciary responsibility to two entities who are in an adversarial sales relationship.”
Finally, Anonymous writes: “If you did do competent [insurance] work and charged a fee, now what do you do? Turn the product implementation over to some commissionable schmuck where you are clearly unsure if your work will be carried out properly. Now the client pays a fee AND a commission!!!” This raises two interesting issues. First, I’m no lawyer, but my guess is that part of an advisor’s fiduciary duty is to be careful not to refer clients to “schmucks,” the competence of whom they are not reasonably sure.
Lastly, the arguments against a fiduciary standard—or in this case, a fiduciary-only standard—invariably include “cost” to the client: which focus on the one-time sales commission vs. the ongoing fee, without considering the total cost to the client.
Considering some of the insurance commissions that I’ve seen, recommending an agent who sells low-load insurance can save a client a bundle. And that goes for highly loaded mutual funds and other proprietary brokerage products, too. And then there’s the intangible benefits of having an advisor who is required by law to act solely in the best interests of their client—at all times.
Since the financial services industry has been largely unwilling to provide this level of retail client service, I suspect investors would welcome an easy way to determine those advisors who do from those advisors who don’t.