"Trust Doesn't Come and Go"

Congress will be busy this fall with regulation for healthcare and re-regulation for financial services, including action to regulate OTC derivatives including credit default swaps, (a way to make highly-leveraged bets on the demise of rival firms–when they lose you win), see article, short selling, broker bonuses, flash quotes and fast trading, and systemic risk among other issues. Perhaps of most interest to wealth managers, there is proposed legislation that would bring all intermediaries who provide advice to individual investors under the fiduciary standard of care.

This editor is a member of The Committee for the Fiduciary Standard, a group which has called on Congress to uphold the authentic fiduciary standard (read more) for all who provide advice to investors–a responsibility that was, when the '34 and '40 Acts were written, solely a function of investment advisors. Now that advising clients has become a typical function for registered reps, everyone providing advice should act in the best interest of their clients, who think have a trusted relationship with their advice-giver, and expect that this fiduciary duty of care is provided–and are shocked to find out, often too late, that it is not. The Committee has articulated five core fiduciary principles; met with SEC Commissioners, and officials from the Treasury, Senate, and House, and we are preparing for more high-level meetings with regulators and legislators.

It's not that the Committee says that broker/dealer registered representatives, or even commission compensation should be eliminated (although there's a proposal in the UK to eliminate them, and proposed U.S. legislation would give the SEC the power to ban forms of compensation that could result in conflicts). And we know that there are registered representatives who do, in fact, put their client's best interests first–and some who want to, but are prohibited from doing so by some B/D's compliance departments. But providing advice to investors on a commission basis can be much more challenging than with fee arrangements. In any case, conflicts need to be resolved in favor of the client, and very robust disclosures need to be made. For those who fret about self-directed brokerage, didn't the old model discount-broker mantra of "we just take orders, we cannot give advice," work well before the end of Glass-Steagall? That's not a fiduciary issue.

Some of the issues are advice, changing "hats" between RIA, B/D and insurance affiliations, conspicuous, full and fair disclosure of all important facts, and conflict resolution in favor of the client. Advice-givers hold a position of trust, and as one Committee member put it so eloquently, once an advisor has that trusted relationship with a client, how can the advisor "go back" to a non-fiduciary relationship? The answer is they can't. You don't see doctors, lawyers, or CPAs going into and out of the fiduciary relationships they have with clients. A consumer of financial or investment advice either trusts the advisor or doesn't. "Trust doesn't come and go."

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.