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Regulation and Compliance > Federal Regulation

"Trust Doesn't Come and Go"

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Welcome to the re-designed and my new blog: Wealth Manager: Viewpoint.

It has been an eventful summer, to say the least. While the acute market crisis has abated in some ways, and stocks have climbed since their March lows, credit markets remain dysfunctional, and unemployment in the U.S. stands at 9.7%. Banks are starting to repay TARP money to the government (and taxpayers)–with interest–and that’s a hopeful sign. There have been several signs that the economy, while perhaps not yet growing, is in a lessening decline–”leveling out,” according to the Federal Reserve’s latest statement. The S&P/Case-Shiller Home Price Indices actually showed a less steep rate of decline in the second quarter, -14.9% compared with -19.1% in the first quarter. While that’s still a terrible decline in the second quarter, the slowing momentum of the decline is–I can’t believe I am writing this–comforting. If you’d asked me five years ago if I would ever call a decline of nearly 15% in an index “comforting” I’d have laughed at your joke. It may be a while still before we see real growth, but the slowing pace of decline is a welcome relief.

Some credit market problems remain inexplicable. For instance, it’s hard to fathom why the auction rate securities (ARS) crisis has dragged on for 18 months now and why investors haven’t been made whole by the underwriters, issuers and sellers of these securities.

One would think that regulators would step in and persuade firms who’ve promised in their covenants to hold auctions to make good on those pledges, or find another way to do so. After all, many of these underwriters were TARP bailout beneficiaries, some of whom are repaying TARP funds and providing generous compensation or bonus packages to executives. It’s inexcusable that there has been such a breach of good faith, and limited response on behalf of investors. See Regulatory Reason, Knut Rostad’s blog for his latest post, “Listen to Chuck,” about New York State Attorney General Andrew Cuomo’s lawsuit against Schwab, and Charles Schwab’s in-the-media response to that suit.

Congress will be busy this fall with regulation for healthcare and re-regulation for financial services, including action to regulate OTC derivatives including credit default swaps, (a way to make highly-leveraged bets on the demise of rival firms–when they lose you win), see article, short selling, broker bonuses, flash quotes and fast trading, and systemic risk among other issues. Perhaps of most interest to wealth managers, there is proposed legislation that would bring all intermediaries who provide advice to individual investors under the fiduciary standard of care.

This editor is a member of The Committee for the Fiduciary Standard, a group which has called on Congress to uphold the authentic fiduciary standard (read more) for all who provide advice to investors–a responsibility that was, when the ’34 and ’40 Acts were written, solely a function of investment advisors. Now that advising clients has become a typical function for registered reps, everyone providing advice should act in the best interest of their clients, who think have a trusted relationship with their advice-giver, and expect that this fiduciary duty of care is provided–and are shocked to find out, often too late, that it is not. The Committee has articulated five core fiduciary principles; met with SEC Commissioners, and officials from the Treasury, Senate, and House, and we are preparing for more high-level meetings with regulators and legislators.

It’s not that the Committee says that broker/dealer registered representatives, or even commission compensation should be eliminated (although there’s a proposal in the UK to eliminate them, and proposed U.S. legislation would give the SEC the power to ban forms of compensation that could result in conflicts). And we know that there are registered representatives who do, in fact, put their client’s best interests first–and some who want to, but are prohibited from doing so by some B/D’s compliance departments. But providing advice to investors on a commission basis can be much more challenging than with fee arrangements. In any case, conflicts need to be resolved in favor of the client, and very robust disclosures need to be made. For those who fret about self-directed brokerage, didn’t the old model discount-broker mantra of “we just take orders, we cannot give advice,” work well before the end of Glass-Steagall? That’s not a fiduciary issue.

Some of the issues are advice, changing “hats” between RIA, B/D and insurance affiliations, conspicuous, full and fair disclosure of all important facts, and conflict resolution in favor of the client. Advice-givers hold a position of trust, and as one Committee member put it so eloquently, once an advisor has that trusted relationship with a client, how can the advisor “go back” to a non-fiduciary relationship? The answer is they can’t. You don’t see doctors, lawyers, or CPAs going into and out of the fiduciary relationships they have with clients. A consumer of financial or investment advice either trusts the advisor or doesn’t. “Trust doesn’t come and go.”

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.


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