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Why the Industry, and Consumers, Need Best Practices for Financial Advisors

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After eighteen months, two drafts and numerous industry comments, the Institute for the Fiduciary Standard Best Practices Board released its Best Practices for Financial Advisors on September 30th.   

Best Practices were developed because federal regulators and industry groups have fallen short in establishing, much less enforcing, a true 40 Act fiduciary standard. 

The SEC, twenty years after the ground-breaking Tully report on conflicts in the retail brokerage industry and five years after Dodd-Frank, is stalled on a uniform standard. Former SEC Chairman Arthur Levitt sees no short-term solution, “The commissioners are so divided philosophically … I believe they will be locked in conflict on this issue for a long, long time.” Meanwhile, the Department of Labor Conflict of Interest rule is moving forward, but how the rule may be implemented, against overwhelming industry opposition, is unclear.

Not a good time to be “Locked in conflict.” The financial crisis, high-profile bad behavior by some finance firms and shrinking investor protections have made investors weary of finance. Investors know something is very wrong. 

A CFA Institute survey finds 96% of its charterholders believe the industry has a “trust problem,” 63% see a “lack of an ethical culture.” A recent CFP Board survey documented huge investor distrust of advisors. By 60% to 25% investors believe “financial advisors act in their companies’ best interest” over “financial advisors act in a consumer’s best interest.” 

2015 is an inflection point. 

Advisors must act to protect investors. They must raise the bar on standard practices, demonstrate they do so and speak out to investors of the great work of good advisors. Best Practices require words and deeds. Best Practices are crafted to be concrete and verifiable and understandable. Best Practices stress ethics, i.e., conflicts of interest, transparency and plain English communications.  

Best Practices address the realities of the post-financial crisis and post-trust era by calling on advisors to embrace three mandates to help resurrect investor protections and to speak to the more skeptical, demanding and sophisticated investor of 2015.

First and foremost, advisors must raise the bar on advisor practices. Three of the twelve Best Practices in particular would resonate with investors. They are: 

  • affirm fiduciary status in writing in all professional relationships at all times
  • disclose conflicts of interest in the written engagement agreement
  • provide statements of fees and expenses.  

Second, we must spell out what this high standard means and be prepared to verify our words with verifiable actions. A clearly written, signed and broadly encompassing statement of fiduciary adherence serves to verify fiduciary status. Only then will trust in advisors be restored. As language expert Michael Maslansky says, “Words in the absence of deeds will fail.” 

Third, since in the public mind fiduciary advisors are indistinguishable from the finance industry and its associated poor reputation, we need to act. Fiduciary advisors must speak out about the great work of good advisors and also (the tough part) against bad behavior of some firms and the false statements about fiduciary duties (and by association) fiduciary advisors. 

The purpose should be clear: to publicly express how fiduciary advisors’ values and practices set us apart. And, if attacked, to reply by correcting erroneous information and unequivocally stating what we believe.

Earlier this year, John Johnson of the broker-dealer National Planning Corporation was quoted as saying something that should have generated an outcry. Johnson said we may need to “cheapen” the “definition of what it means to be a fiduciary… in order to get everyone on the same playing field.” The statement was not publicly refuted. This was a mistake.

When competent and ethical advisors do nothing or say nothing investors will (unfairly) conclude advisors and the bad behavior of finance firms are one and the same. So, kudos to CFA Institute for its Future of Finance campaign and calling for ‘Naming and Shaming.’ And kudos to FPA President Ed Gjertsen for urging FPA members to speak out.

Many advisors know very well that investor protections have diminished and many investors feel “finance” has, in effect, cheated on them. What they may not know is what they can do to help distinguish advisors in the public mind and make a difference in bolstering investor protections, That is, connect with investors in the public square on the value of fiduciary advice by speaking out on Best Practices. 

Start with a small step that resonates with investors. Explain why investors should require an advisor to put in writing that they are fiduciaries to all clients at all times, provide a written statement of conflicts in their advisory agreement and provide an annual statement of total fees and expenses. 

Too burdensome for the advisors? No. Important to strengthen investor protections? Yes. Important to the post-trust era investor? Hugely.     

Advisors need to resurrect investor protections. This means raising our bar, explaining what we do and fighting for what we believe because, at the end of the day, no one else will.