More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Financial Services Institute (FSI) has become, in essence, the red-headed stepchild in the fiduciary debate among advisory trade groups. FSI believes the Securities and Exchange Commission (SEC) should craft a new "universal" fiduciary standard for brokers and advisors, instead of putting brokers under the fiduciary standard as set out in the Investment Advisers Act of 1940.
I caught up with Dale Brown, president and CEO of FSI, by phone in early September to delve into more detail about why FSI believes a new "universal fiduciary standard of care" is warranted, and to gauge whether the FSI has made any strides in convincing the SEC to heed its advice. FSI represents independent broker-dealers as well as individual BD representatives.
In its August 30 comment letter to the SEC regarding how the regulator should go about requiring brokers to adhere to a fiduciary duty, FSI wrote that "attempting to solve the inconsistencies in the competing standards of care by transferring the standards and requirements developed over decades for investment advisers to the broker-dealer world--a world that has its own history, business practices, and clientele--is fraught with difficulty."
It is a mistake to assume, the FSI continued, "the existing investment adviser case law can be easily translated into clear conduct rules for broker-dealers and registered representatives. Simply imposing the amorphous standard of care and other Adviser Act requirements on broker-dealers and registered representatives would subject these firms to tremendous uncertainty as to their compliance obligations. Firms cannot control costs if they do not know what is expected of them. As a result, we would expect firms to react to the imposition of the Adviser's Act standard by limiting their services to investors who offer significant profit potential thereby reducing investor access to products and services."
Industry trade groups as well as advisors, broker-dealer reps and insurance agents had until August 30 to voice their opinions to the SEC about how--or if--a fiduciary standard should be applied to brokers before the regulator's study of the issue officially got under way. Advisory and consumer trade groups also joined forces to make sure the SEC got to hear what investors want regarding a fiduciary standard.
Investors Still Confused on Fiduciary
One of those messages came in mid-September: The Consumer Federation of America (CFA), American Association of Retired Persons (AARP), the Investment Adviser Association (IAA), the CFP Board, and the North American Securities Administrators Association (NASAA) released survey results that confirm, once again, that the majority of investors are confused about which type of advisor is required to act as a fiduciary on their behalf, and that the majority of investors believe all financial professionals providing investment advice--including insurance agents--should be held to a fiduciary standard.
The telephone survey of 1,319 investors conducted between August 19-23 found that nine out of 10 U.S. investors (or 91%) believe a stockbroker and an investment advisor who provide the same kind of investment advisory services should have to follow the same investor protection rules.
"Investors don't understand the difference [between advisors and brokers] because the differences no longer make any sense," says Barbara Roper, director of consumer protection for the Consumer Federation of America (CFA). "Investors view [advisors and brokers] as indistinguishable; the clear conclusion is that you have to regulate them accordingly, and that means applying the Advisers Act fiduciary duty to their advice and recommendations about securities." Roper says the survey results will be formally submitted to the SEC, and individual copies will also be sent to SEC Chairman Mary Schapiro and the SEC Commissioners.
The survey also found that 97% of the investors polled said a financial professional who is providing advice should put the clients' interest ahead of their own, and should be required to disclose up front any fees or commissions they earn and any conflicts of interest they have. Ninety-six percent of poll respondents also agreed that the fiduciary requirement should extend to insurance agents selling investments.
The investor survey will catch the attention of the SEC. But let's hear more about FSI's position from Brown.
The FSI's Dale Brown Speaks
Can you explain a bit more why FSI believes the SEC needs to craft a new fiduciary standard for brokers and advisors?
Independent broker-dealers and advisors are going to adapt to whatever changes are imposed on them in the regulatory environment. Our concern is that it's small investors who won't get the benefit of a new higher standard if it raises the cost and pushes advice out of their reach.
Explain why there would be a higher cost for investors.
If there's a higher legal standard, and we're not debating whether or not there should be, we're saying it's got to be a standard that works for all business models and all client situations--a standard that does not have the unintended consequence of making advice less available and less accessible.
There will be increased liability because the advisor is held to a higher standard; they are going to have to prove at some point to somebody that they are meeting that standard. If clients aren't satisfied and decide to file a complaint and pursue action, [advisors] may have to prove after the fact in some kind of arbitration forum or court--that's increased liability in their business, and every smart business person is going to find ways to mitigate that liability.
Documentation is going to be more intense, so that raises the costs of doing business; their business liability insurance coverage will potentially cost more. A fiduciary standard, whether it's one under the Investment Adviser's Act ... or whether it's a new universal standard that we're describing ... inherent in that is the expectation that the client is going to receive more disclosure. We think the disclosure ought to be focused on effectiveness as opposed to volume, but changes in the disclosure requirements are going to mean it's going to cost the advisor money in order to meet those disclosure obligations--whether it's providing the disclosure on paper or electronically, they've got to incur costs to develop that.
Have you gotten any feedback from the SEC on its willingness to create this new standard?
Not yet. We will continue to talk to them.
Do you have a sense of what this new fiduciary language should look like?
We've suggested it ought to be based on certain broad principles, but we haven't yet engaged the SEC beyond this comment letter. We know from the SEC's public comments, particularly Chairman Schapiro's, that she has said there ought to be a fiduciary standard [for brokers] and they intend to move forward; that's fairly clear.