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.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
As many are already aware, the fiduciary issue has become an SEC hot topic relative to the standard to which each financial advisor will be required to adhere. Depending on which side of the debate you’re on, whether you are an advisor or broker, each of your opinions is colored by your own biases. As such, I’d like to share my perspective on the fiduciary debate when viewed through the lens of a slightly different, yet meaningful and relevant professional code of standards, as I believe it underscores the need for a distinct difference to be made between a fiduciary advisor and a broker/salesperson.
In the realm of the long-time prestigious designation known as the Certified Public Accountant (CPA), the word “independent” resonates across the entire discipline as one of the three main accepted auditing standards. “The auditor must maintain independence (in fact and appearance) in mental attitude in all matters related to the audit,” per the U.S. Generally Accepted Auditing Standards. It’s the phrase “in fact and appearance” that resonates with great similarity between the auditing profession of a CPA and the investment advising profession of a financial advisor. I believe it further helps make the case as to why there should be a distinct difference made between a fiduciary advisor and a commission-based broker/salesperson.
The financial advisor profession is a little confusing because, currently, anyone selling insurance, annuities or mutual funds, a stock broker, registered investment advisor, or anyone with the letters CFP, CFA, CIMA or other combination after their names, can all call themselves a “financial advisor.” How in the world within one profession can there be such a vast amount of conflicting overlaps for the term ‘financial advisor’?
Furthermore, how can we expect the general public to know the difference between an investment advisor and a salesperson, if both can be called financial advisors? Should both types of financial professionals legitimately be able to say they offer financial advisory services if only one is subject to a fiduciary standard? In medicine, this would be akin to allowing physicians in general practice to act as heart specialists anytime they have a patient with a heart issue; or allowing nurses to perform surgery for a doctor. This isn’t accepted practice, so why should we tolerate lesser standards in the financial arena?
A CPA is qualified to provide auditing work to any third-party client if they wish to do so. However, there is a standard for each audit engagement to which a CPA must adhere and they have to be independent in fact and appearance in order to provide that audit service. Sowhy is this independence so important?
If an audit report is written on the financials of any publicly traded company, there’s an opinion provided with regard to how well that company’s financials are presented. Every day, many people make judgment calls on that company’s financial assets, liabilities, overall position, and even the company’s growth potential, based partly on the audit report opinion provided by a CPA. Consequently, the need for a completely independent in fact and appearance auditor, is necessary to maintain the public credibility on how well a company’s financial statements present as a whole.
So what does this have to do with financial advisors? I believe the two are quite similar in nature.
Per Wikipedia, the term fiduciary relates to “a legal or ethical relationship of
No one should be allowed to wear both hats in the financial advising world. Either you provide financial planning, investment advice and/or asset management services comprehensively under a “fiduciary standard in both fact and appearance” all the time, or you sell products only as a broker/sales erson adhering to a suitability standard. Those that choose a business model which adheres only to a suitability standard should be required to fully disclose and advertise that they are not fiduciaries and cannot plan, advise or manage assets under the appearance of a fiduciary capacity.
How is a financial advisor that is both licensed to sell insurance-related products and provide fee-based asset management services able to comprehensively plan a person’s financial endeavors, retirement, insurance needs, taxes, etc., objectively in all mental attitudes, and then make recommendations between commission-based products and fee-based asset management? There is no way humanly possible to do that completely in a fiduciary manner.
First, the commission product is usually provided under an upfront commissioned sales arrangement that is immediately more financially beneficial to the advisor, versus the fee-based asset management recommendation. Do we really believe advisors can make those recommendations, independent in all mental attitudes, of the compensation differences? Second, how are we to regulate the financial/retirement planning advice a non-fiduciary sales person provides to a client? Is the commissioned product only subject to the suitability standard, or does it become part of the fiduciary recommendations, such as fee-based asset management, which was also recommended?
Making all true financial advisors adhere to a “fiduciary standard in both fact and appearance” is a critical step forward for our industry. All registered investment advisors that already adhere to the fiduciary standard should gladly be amenable to this small change. However, for those “hybrid” advisors who try to wear both hats, it’s time to make a decision. Either adhere to a fiduciary standard in both fact and appearance, or remain a sales person under a suitability standard.
We can’t continue to allow hybrid individuals or firms the flexibility to play their fiduciary or suitability standard roles when and where it benefits them with the
I realize this is a very sensitive subject in our industry, but at the end of the day, isn’t it the client and their best interests that should be of utmost importance? I believe it’s time to clearly delineate the difference between those who adhere to a fiduciary standard “in both fact and appearance” from those that are perceived to be fiduciaries, but legally are not. The need for a company’s finances to be presented through an independent and accurate audit report conducted by a CPA, is just as important as an investor’s need to know whether their financial advisor is a real fiduciary “in both fact and appearance” or just a salesman.
Andrew D. Rice, CPA, AIF, CTS, WMS, is vice president of Money Management Services, Inc., an independent RIA firm in Birmingham, Ala. He is a Certified Public Accountant, an Accredited Investment Fiduciary, a Certified Tax Specialist and Wealth Management Specialist. He can be reached at email@example.com.