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Industry Spotlight > Broker Dealers

Six Choice Pieces of Fiduciary Misinformation

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Why Shouldn’t Investors’ Interests Come First Wealth Manager:

There is a great deal of information surrounding the fiduciary conversation that is just plain incorrect–as in, not fact–whether from ignorance or deliberate obfuscation by parties with huge axes to grind. Here’s what one reader commented in response to that last post:

“Placing all advisors under a fiduciary standard will not automatically bring about positive results. Bernie Madoff was a fiduciary and he perpetrated the biggest financial fraud in U.S. history. Additionally, the imposition of this standard assumes that anyone is capable of determining what is “best” for a client–best when, best compared to what, best as determined by what standard or standards and who determines what those standards are. We will create a hotbed of potential litigation. Additionally, it is very possible the SEC would outlaw commission based sales. Experience in the UK in this type of environment would indicate that tens of thousands of advisors may leave the business, leaving consumers with few choices to go for advice. This is bad legislation. That’s why it needs to be studied further for its impact.”

But I must point out that:

  1. Bernie Madoff was by no measure a fiduciary. He was a broker/dealer most of his career, and most of his crimes were conducted under NASD-FINRA self-regulation. When he registered as an investment advisor in 2006, he had a fiduciary duty to his clients, but it seems that, sadly, that was never a duty fulfilled. Sad that SEC missed the boat as well.
  2. No regulation or legislation will deter a criminal. Madoff’s acts were criminal. When we talk about fiduciary duty, we are talking about law abiding advisors doing the right thing by their clients.
  3. Being a fiduciary does not preclude commission compensation. It is about disclosing all material facts–including compensation. It’s about putting your client’s best interests first. A fiduciary has to act in a prudent manner; disclose conflicts and all important facts; avoid or manage in the investor’s interest all material conflicts; disclose fees and control expenses; follow and document a due diligence process in making decisions; and diversify investments.
  4. Litigation: if you have fiduciary processes in place, and operate in your clients’ best interests, you should have less litigation, not more. There are many years of court rulings that guide the underlying fiduciary principles.
  5. Serving investors: if putting clents’ interests ahead of advisors’ interests drives “tens of thousands” of advisors from the business, so be it. Clients will be better off, not worse off. Small clients are eschewed by most broker/dealers anyhow.
  6. The RIA model, with a defined “scope of engagement,” permits fiduciary advice without ongoing monitoring, if that is the defined engagement. The key is that it is defined, up front, and acknowledged by the client. That’s another myth that’s circulating–that brokers are concerned that as fiduciaries they’ll be responsibile for ongoing monitoring of a client’s portfolio. Indeed, if the scope of the engagement says that ongling monitoring is part of the engagement, they would be responsible for that. (What are those 12b-1 fees supposedly paying for anyhow? That’s a discussion for another day.) Isn’t it better for smaller investors to get fiduciary advice on the investments?

The amount of misinformation circulating about the application of the fiduciary standard to everyday brokerage situations is stunning. For more about these misunderstandings, take a look at Wealth Manager Contributing Editor, and Chairman of The Committee for the Fiduciary Standard, Knut Rostad’s “One Cheer for NAIFA.”

As far as who determines “what is ‘best’ for a client” you are giving advice to, you will need a process in place for determining that the advice you provide is in the best interests of your clients. There are firms that can help you put that knowledge and structure into place in your practice. The investment advisory model has been around–and quite successful–for 70 years, so there is plenty of precedent for advisors being fully capable of putting clients’ interests ahead of their own and still being able to run a profitable firm and make a comfortable living.

There is room, as well, for brokers who don’t want to give advice–they want to sell. Nobody says you must be an advisor. If you want to sell, and not provide advice, then that relationship needs to be established with the client up front. The client and broker both need to acknowledge that it’s a sales–not an advisory–relationship. And, your title would need to reflect that you are a salesperson, not an advisor, counselor, or consultant.

The reality is, from the many off-the-record meetings and calls I have been part of since last June, when the fiduciary movement took flight, the real discussions that are taking place in Washington couldn’t be further away from the misinformation that’s been propagated by a few, albeit powerful, entities. Discussions taking place with regulators, advocacy groups for all sides, legislators, the Department of Labor, Treasury, Senate and House of Representative and Committee offices–have been enlightening and very thoughtful and, in some ways, surprising.

The introduction of the Dodd financial reform Bill–Take II–with its 180-degree turn from the November Dodd I Discussion raft, which required those who provide advice to register as investment advisors and did away with the broker/dealer exemption, is a temporary glitch in the road for investors. Because after all, once they are aware of the differences between those who put client’s interests first and those who don’t, what investor is going to sign on with an intermediary who won’t put their clients’ interests first?

And, a requirement for fiduciary duty did pass, in the House’s version of financial services reform, in December. There are several steps still to come regarding this Senate proposal: amendments, mark-up, floor debate, and, if it passes, reconciliation of the House and Senate versions of the Bills. In Department of Labor rules announced at the end of February, there are new fiduciary requirements for those who wish to advice investors with IRAs. Big broker/dealers are discussing the fiduciary standard. The discussion of how to bring forth the fiduciary requirement continues–and it’s necessary that it does, to restore investor confidence. Firms will have to make a choice: to put their clients’ interests first or not. Fiduciary duty or not. If you were the investor, which would you choose?

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

Read more Wealth Manager: Viewpoint blog posts: Why Shouldn’t Investors’ Best Interests Come First? February 25, 2010 Are Senators strong enough–and do they have enough integrity–to stand up on behalf of retail investors and insist on extending the fiduciary standard to cover those who provide advice to retail investors?… Greater Good: The Unintended Consequences of Repaying TARP January 29, 2010 Did the requirement to repay TARP funds in order to pay bonuses for 2009 prompt some banks to repay the bailout funds too early? … Smart Money January 19, 2010 Goldman Sachs Chairman and CEO Lloyd C. Blankfein testified that at Goldman Sachs, “…we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors.” … Ever Hopeful December 29, 2009 As we emerge from a challenging economic crisis, there is reason to hope that changes and opportunities we will see in this new year–some as a direct result of the economic crisis–will be positive…. Schapiro’s Call for Fiduciary Standard Reflects SEC’s Original Mandate December 07, 2009 “I believe that all securities professionals should be subject to the same fiduciary duty,” says SEC Chair Mary L. Schapiro…. Mr. Dodd’s Message from Washington November 16, 2009 Now that we have heard from both the House and Senate committees on finance and banking about investor protection, let’s not misinterpret what they are saying. Can the DJIA at 10,000 Inspire “Animal Spirits?” October 16, 2009 The Dow Jones Industrial Average hit a year-to-date high and jumped above 10,000 on Oct. 14, and the next day hit another high of 10,062.94. Unless you are short, this is good news for you and for your clients. “Federal” versus “Authentic” Fiduciary Duty October 08, 2009 Both investment advisors and broker/dealer registered representatives routinely give financial and investment advice to clients. What is still different is the rules that protect those investors…. Are you Ready? September 22, 2009 Financial reform is around the corner. How will it affect you and your clients? The Capital is abuzz with discussions regarding re-regulation of financial services, something that the Administration wants to see passed by year-end…. “Trust Doesn’t Come and Go” September 08, 2009 Once an advisor has that trusted relationship with a client, can the advisor “go back” to a non-fiduciary relationship?… Another Bernanke Term? August 26, 2009 President Obama nominated Fed Chairman Ben Bernanke for another four-year term on August 25, “because of his background, his temperament, his courage, and his creativity,” in fighting the financial crisis that is now entering its third year. … Can Derivatives be Tamed? August 14, 2009 Obama proposes reforms for OTC derivatives…Judge Jed Rakoff wants answers about Bank of America-Merrill bonuses…the Lewis Liman defense…. Avoiding Depression August 10, 2009 Depression Averted…says Paul Krugman…Should the Sec be self-funded? They make much more for the Treasury than they receive from Congress…… More


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