The CFA Institute and the Wall Street Journal seem to agree that fiduciary is not an appropriate moniker for every financial consultant. Titles, such as “advisor” or “broker,” should be used by different groups. Dealing with a fiduciary is no guarantee of getting excellent service or superior quality. Last DecemberThe Wall Street Journal and the CFA Institute issued statements on the difference between Brokers and Advisors.
Although coming from and going to different directions – WSJ in a public article and the CFA Institute in a letter to SEC Chairman Jay Clayton – they came to remarkably similar conclusions.The CFA Institute, the professional association of more than 149,000 investment analysts, developed their own prioritized list of regulatory recommendations. Number one on their list was the fiduciary obligation of investment professionals – the Institute’s solution to the difficulty the SEC will have in trying to draft a uniform fiduciary standard that applies to everyone who renders investment advice to retail investors. Their solution is to regulate the titles that those who provide personalized investment advice can use. They recommend that “adviser” or “advisor” be reserved exclusively for those who “adhere to the Investment Advisers Act and the fiduciary duty implied by common law interpretation of the Act.” Recognizing that “commission-based sales activities serve important client needs and give investors options for how they wish to conduct their investment activities,” they suggest that commissioned activities continue as long as the brokers are clear about their responsibilities, as in referring to their roles with the title, “salespersons.” They point out that sales staffs have blurred the line between what they do – selling investment ideas to generate commission-based transactions – and rendering recommendations in the clients’ best interests.
When you think about it, it doesn’t seem to make any sense to put both activities under the umbrella, does it? The WSJ also pans the idea of a common fiduciary under the sub-banner, “Fiduciary isn’t everything”. They accurately state that having a fiduciary responsibility doesn’t guarantee a financial professional will dole out sound advice or generate better investment returns for clients. They advise investors to ask about the broker’s or advisor’s status. But, they caution, do not rely on that status as the sole basis for hiring or firing a helper. Investors should focus on their needs, goals and trust in the advice helper. Charles Field, a New York-based partner at the law firm Sanford Heisler Sharp LLP, and co-chairman of the firm’s financial-services practice, made the typical investor mistake of focusing on performance as the key. Nothing could be further from good advice. It may be a factor, but it’s not THE factor (or at least, it shouldn’t be). However, Field says: “You wouldn’t keep your gardener if all your shrubs were dying. You’d get another one. The same thing should be true for your financial advisor.” The WSJ article correctly points out that some investors may be better off paying transaction commissions to a broker who is paid by a commission on transactions than with a “fiduciary” advisor who is a fiduciary who collects an asset based fee” — for instance in the case of buy and hold or bond strategies. For more ongoing advice and rebalancing, maybe the investment advisor is the right person.
But as the CFA institute points out, the title doesn’t vest excellence. It becomes an individual investor decision, dependent on the psychology of each investor. There is no one right answer that fits everyone. Industry veteran, Jamie Price, CEO of Advisor Group, advises investors to refuse to work with anyone—fiduciary or not—who doesn’t meet their expectations. “The best advisors are very transparent about everything,” he says. Since SEC Chairman Clayton said they should have their fiduciary rule out shortly, implying, “It isn’t that difficult” (My words, not his), it will be interesting to look at what they Regulator came up with today.
Here are a couple possibilities:
1. It mirrors the defunct DOL rule.
2. It mirrors ERISA (Hey, it’s already written!).
3. It’s follows the CFA Institute suggestion.
4. It’s watered down. Bets, please. In February the SEC’s chairman Jay Clayton told conference attendees in Washington that the SEC’s effort was a top priority for him.
“I don’t think it’s any secret that we’re going to make a big effort to try to bring clarity and harmony to the investment adviser, broker-dealer standard of conduct regulation — something that’s important to me,” Clayton said. In March, Clayton told attendees at the Orlando conference of the Securities Industry and Financial Markets Association, a trade association and one of the plaintiffs that sued the DOL to strike down its rule, that retail customers interactions with financial advisors are covered by “at least five” regulators. “I’ve convinced myself that we need to do something to try and bring that five, six, seven number down,” said Clayton. Gravante expects that the SEC’s proposal will hit all the “mom and apple” pie points about investor protection especially of elderly investors or those who are less financially sophisticated, given the SEC’s recent emphasis on protecting retail investors from high fees and Ponzi schemers.
The SEC, on the other hand, never used the word “fiduciary” in a meeting notice describing the new and amended rules it will propose on Wednesday. The SEC version would cover a much broader group than the Labor Department, one that includes registered investment advisors, broker-dealers, and “associated persons” of broker-dealers who make recommendations to a retail customer on any securities transaction or investment strategy involving securities.