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Side-Stepping SEC and DOL, 11 Fiduciary Best Practices for Advisors Are Proposed

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The Institute for the Fiduciary Standard released a set of 11 best practices on Thursday intended, in the words of Institute President Knut Rostad, to counteract the persistence of “investor misperceptions” about the difference between product-selling brokers and fiduciary advisors.

These best practices have been in the works since April 2014 by an Institute Best Practices Board of five advisors — Clark Blackman, Bryan Beatty, Christopher Cannon, William Prewitt and Rostad — with Brian Hamburger of MarketCounsel serving as counsel to the Board. A separate group, including Vanguard founder John Bogle and Boston University Professor Tamar Frankel, advised the board in its deliberations.

In a press conference held during the TD Ameritrade Institutional LINC national conference in San Diego, Rostad, Hamburger, NAPFA CEO Geoffrey Brown and Frankel (by phone) discussed the genesis of the best practices; revealed that they will be available for public comment through March 9 with the final principles released, said Rostad, “by June or July” of 2015; and expressed their hopes that advisors can use them “in the public square.”

“It’s likely the SEC won’t do anything” on implementing a fiduciary standard for all advice givers, Rostad said, so the “advice industry itself should make it happen.”

However, Rostad, who is a regular blogger for ThinkAdvisor,said the best practices were “crafted to allow brokers to meet the standard,” and said “we hope brokers will look at these carefully.”

Said Frankel: “Investors mistrust advisors. It’s time for advisors to speak to their clients” about the “fundamental differences between salespeople and fiduciary advisors.”

Following the 1929 market crash, the Investment Advisers Act of 1940, Frankel said, “clearly separates advice givers from product salespeople.” The best practices proposal are meant to clearly show to end clients that “my advisors have no conflicts of interest that I do not know about.”

Hamburger said the best practices “make it clear which side of the aisle they stand on” and that the Institute will “work on a verification model for testing to the standard,” conferred by a third party. While that verifying third party has yet to be decided, Rostad suggested that such verification might well take the form of a separate certification for advisors who follow the best practices.

Hamburger further said the push for the industry to adopt a best practices model is a “classic private industry response” to the issue. “The intent is to create a clear standard,” Hamburger said, while Rostad said the best practices “is about managing the conflicts,” noting that the practices do not explicitly outlaw commissions.

Rostad said comments are welcome, and asked that they be emailed by March 9, 2015 to [email protected]. The press release and theproposed best practices can be downloaded here

The 11 best practices are: 1. Affirm the fiduciary standard under the Advisers Act of 1940 governs the professional relationship at all times.

2. Provide a “reasonable basis” for advice in the best interest of the client. 

3. Communicate clearly and truthfully, both orally and in writing. Make all disclosures and agreements in writing. 

4. Provide, at least annually, a written statement of total fees and underlying expenses paid by the client. Include an accounting or good-faith estimate of any payments to the advisor or the firm or related parties from any third party resulting from the advisor’ s recommendations. 

5. Avoid all conflicts and potential conflicts. Disclose all unavoidable potential and actual conflicts. Manage or mitigate material conflicts. Acknowledge conflicts of interest can corrode objective advice.

6. Abstain from principal trading unless a client initiates an order to purchase the security on an unsolicited basis.

7. Avoid significant gifts, third-party payments, sales commissions, or compensation in association with client transactions that cannot be directly credited back to the client or managed as a fee offset.

8. Ensure baseline knowledge, competence, experience and ongoing education appropriate for the engagement.

9. Institute an investment policy statement or an investment policy process that is appropriate to the engagement and describes the investment strategy. Consistently follow and document a prudent process of due diligence to research and analyze investment vehicles; on request, document the prudent process applicable to any recommendation.

10. Have access to a broad universe of investment vehicles that provide ample options to meet the desired asset allocation and in consideration of widely accepted criteria.

11. Consider peer group rankings in ensuring compensation and expenses are reasonable.

— More from the TD Ameritrade Institutional LINC conference: