More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
There have been more insightful comments on the ‘Fiduciary-Only’ issue, this time to my August 20th blog, Fiduciary-Only Advisors: Of Attorneys, 'Agents' and Schmucks. The first came from David Sterling, who also gets bonus points for attaching a creative headline of his own: “High Horse or Horse of a Different Color?” to his discussion of the breadth of a “financial planning” fiduciary duty.
“The scope of the fiduciary duty applied to CFPs defies imagination and, if not that, practical reality,” Mr. Sterling wrote. “Consider the practice management implications of being held to a level of competency and accountability for allegedly possessing the expertise and technical skills to serve the ‘best interests’ of the client on ‘all’ matters financial described by the author. [Insurance, investments, estate planning, retirement planning and college planning and investment advice.]… A properly drawn engagement letter could fill volumes with the listing of exclusions required to effectively inform the client of advisory limitations to serve his or her ‘best interests.’It is why I believe care needs to be exercised to distinguish ‘investment advice’ from ‘financial advice.’ It is also why I believe financial advisors and industry gurus need to more effectively articulate their intentions when subscribing to a ‘fiduciary standard.’ It has been my experience that those who are quick to saddle up on a ‘high horse’ are often compelled to seek a ‘horse’ of a different color when called to task.”
Mr. Sterling’s comments remind me of a financial planner back in the mid-1980s. This prominent CFP had written some popular books on financial planning and was regarded by the media and the financial planning community as one of the leading planners in the country. But she had recommended some limited partnership investments (popular financial planning tools at the time) to many of her clients, and some of them went south.
Some of the clients she’d put into those partnerships sued her, claiming she’d neglected to disclose that she’d had a financial interest in those partnerships. Her defense was that she’d been a broker, rather than a financial planner, to all but about a dozen of her clients (who were not in the partnerships in question), and therefore owed the partnership investors no duty to disclose her conflicts.
And she won.
I imagine this is exactly the kind of situation envisioned by Mr. Sterling. And I have no reason to doubt the difficulties that he envisions for CFPs trying to live up to a fiduciary standard for their clients.
To my mind, the onus for establishing standards for how CFPs should live up to a fiduciary standard fall squarely on the CFP Board, which unilaterally declared that CFPs were required to meet that standard without much direction as to how that might be done. Presumably, the Board believes that its comprehensive CFP exam is sufficient to establish the necessary expertise in each area of financial planning of those who pass it.
Of course, the Board does not require that CFPs be “fiduciaries” at all times to their clients. As I read the Board’s standards, CFPs are required to be fiduciaries for each client only when they are doing “financial planning.” If a CFP is acting in his/her capacity as a broker, the Board’s fiduciary standard would not apply. Which, again, creates client confusion, that to my mind illustrates the need for “fiduciary only” advisors (CFP or not), who always act in the best interests of the clients, throughout the entire scope of every “engagement.”
In her comment to my last blog, P Potts exhibits her typically astute insight: “I don’t see where the confusion lies. Ask Mary Jo [White; chairman of the SEC] to simply require that a firm be either an RIA or a BD, and [state] that no individual can be a member of both.”
It’s certainly possible that this is the ultimate endgame to the discussion that Dodd-Frank started about making retail financial advice as client-centered as possible.
What she’s describing is a kind of Glass-Steagall Act [which separated lending banks from investment banks] for financial advisors; that would create a clear distinction between fiduciary advisors and retail brokers. Then retail investors could decide for themselves whether they want “advice,” or help purchasing financial products they’ve already decided upon. Under the Board’s current standards, that would seem to put CFPs on the RIA side of the fence. Problem solved.