More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
There were some very interesting comments to my last blog about the recently released Finke/Langdon Report. In comparing states that impose a clear fiduciary duty with those that impose a limited fiduciary duty and those with no fiduciary duty on brokers, the report found there was “no statistical differences” in the ratio of middle class to HNW clients, the range of products provided, the personalization of advice or the costs involved, or in the effect on broker/dealers themselves, w
The first was by consultant David Sterling, who made some curious assertions that warrant further exploration. For instance, he led off with: “And yet, the evidence to substantiate the value of those ‘who allege’ to serve the best interests of their clients remains untested or perhaps, disregarded.”
One can only speculate that by “those who allege to serve the best interest of their clients” he means RIAs, who are required by law (the ‘40 Investment Advisers Act, and subsequent rulings) to serve the best interests of their clients. It’s certainly fair to say that there are some people who fail to comply with virtually any law, and yet, in many cases we can find “evidence” of the actual effects of a particular law. It just so happens that the RIA fiduciary standard vs. the broker suitability standard is an excellent example. Contrary to Mr. Sterling’s assertion that the relative value of these standards are “untested” or “disregarded,” there is considerable research available that sheds light on the issue.
For instance, I modestly cite my own AdvisorOne blog of March 20 that relayed FINRA and Bloomberg data showing that in 2010, there were 5,680 complaints brought against brokers, with half resulting in damage awards. During that same year, the SEC took 113 enforcement actions against investment advisors or investment companies—about 2% of the broker complaints. The relative sizes of those groups in 2010? 50,200 retail brokers vs. 41,500 independent and dually registered RIAs. This seems to suggest that the fiduciary standard is, in fact, having some positive effect.
Next, Mr. Sterling went on to say, “There is world of difference between investment management under SEC regulations and the scope of financial services required to serve client interests. For example, many of those who operate under the mandated fiduciary standard demonstrate a very limited base of knowledge regarding other elements impacting the financial lives of their clients.”
This is a most curious statement, considering that a large portion of independent RIAs is composed of financial planners. (There are some 66,000 CFPs today, with brokers comprising substantially fewer than half of those.) It is financial planners who most often claim that many brokers lack sufficient knowledge and training in comprehensive personal finance to competently serve their clients. My experience suggests that more often than not they are right. What’s more, the CFP Board includes a fiduciary standard in its Code of Ethics.
Finally, Mr. Sterling with: “…the word ‘best’ is an evasive moving target and should be alleged, at best, as an endeavor.” At last, we have something we can agree on. Yet the understanding that serving the best interests of the client is an “endeavor,” doesn’t mean that we can’t—or don’t—have a minimum set of standards that tell us what the 'best interest of the client' means, at a minimum. There are a number of “fiduciary standards,” from the SEC, the DOL, case law on various statutes, to those set out by various advocacy groups such as the Institute for the Fiduciary Standard.
But as far as I can tell, they all include:
- full disclosure to the client of material facts
- avoiding conflicts of interest
- the mitigation of unavoidable conflicts
- placing the client’s interests ahead of the interests of the advisor or the advisor’s firm, or any other party
- acting with prudence and the good judgment of a professional.
These seem like a pretty good place to start, and one that would enhance the care of the majority of brokerage clients.