More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Most brokers and investment advisors believe that extending the fiduciary standard to brokers would help regain investors' confidence. They also believe that SEC Chairman Mary L. Schapiro supports extending the fiduciary standard to brokers who provide advice to investors, according to findings in the new “fi360-AdvisorOne Fiduciary Survey.” The vast majority of brokers and advisors, 81.4%, also say that “disclosures alone,” are not “sufficient to manage conflicts.”
These are the details of eight interesting, and often surprising, findings on the eve of the SEC report to Congress on its Fiduciary Study, which was mandated under the Dodd-Frank Act.
1. Extending the Fiduciary Standard to Brokers
Of 684 brokers and investment advisors who participated in the survey, which ran from Nov. 23 to Dec. 31, more than two-thirds, 67.3%, say a “uniform fiduciary standard for brokers and advisors would help regain investors’ confidence.”
More surprising was the make-up of the affirmative responses: Of the respondents who answered "yes" to this question, it was a nearly even split between brokers (fee/commission and commission only), 49.8%, and investment advisors (fee only and fee-based), 50.2%.
2. Does SEC Chairman Schapiro Support Extending the Fiduciary Standard to Brokers?
Almost two-thirds of survey participants, 62.3%, say the SEC Chairman “supports extending the Fiduciary Standard, as in the Investment Advisers Act of 1940, to brokers who provide advice.”
3. Are Disclosures Sufficient to Manage Conflicts?
Of the overall 81.4% who answered that "disclosures alone are not sufficient to manage conflicts, " the broker-investment advisor split was also notable, with slightly more brokers (51%) than investment advisors (49%) saying disclosures alone are not enough to manage conflicts. But for the overall minority of 18.6% who answered that disclosures would be sufficient to manage conflicts, 74.4% are brokers, and 25.6% are investment advisors.
4. Do Investors Understand the Differences Between Brokers and Investment Advisors?
An overwhelming number of participants, 95.7%, say investors do not “understand the differences between brokers and investment advisors.”
While it has been reported that some organizations have voiced fears that extending the fiduciary standard would limit investors’ choice of advisor, product or service, or cost more to investors, the majority of brokers and advisors in this survey do not agree.
Would Extending Fiduciary Duty to Brokers:
5. Raise Costs for Investors?
No, the majority of respondents, 74%, do not “believe it costs investors more to work with fiduciary advisors than brokers when all costs to the investor (not only the advisor’s compensation) are considered.”
6. Reduce Product and Service Choice for Investors?
No, most participants, 68.6%, say they do not “believe a fiduciary duty for brokers who provide advice would reduce product and service choice for investors.”
7. Price Some Investors Out of the Market for Advice?
No, more than two-thirds surveyed, 66.9%, do not “believe a fiduciary standard of care for brokers would price some investors out of the market for advice.”
8. Do You Have a Fiduciary Relationship With Your Clients?
The majority of brokers and investment advisors, 58%, say they already have a fiduciary relationship with their clients. But, 12% say they do not, and 19% say: “some are RIA-fiduciary relationships and some are BD-suitability relationships.” And 11% of the participants answered: “for some clients, I have both a fiduciary relationship and suitability relationship.”
The 684 survey participants include 40.8% who are RIAs; 22.4% who are brokers; and 39.6% are advisors with dual registrations.
The survey was conducted by fi360 and AdvisorOne.com. fi360 provides training, tools and resources for investment fiduciaries. fi360 and AdvisorOne.com team up again soon in the fi360 2011 Article Competition.