August 16, 2010
The Fiduciary standard is one of the most important elements that can come out of financial regulation. The self-interest that is inherent in the current financial services models put the consumer at a great disadvantage.
The following should be considered:
1) Compensation is frequently obscured in disclosure documents that are pages of legal jargon. The compensation paid by the consumer to the salesperson whether a stockbroker, a mortgage broker or insurance salesman should be obvious. Short disclosure documents should be developed and require the client to sign before buying any products. References of provisions where legal jargon is necessary can accompany the short disclosure form.
2) Alternative products that are lower cost and lower compensation must also be disclosed.
3) Asset fees should clearly state the services rendered for the fee. Is it just investment management or are other services included?
Financial advisors of all types have the same position with the average consumer as a physician. The knowledge gap is too wide and the consumer ultimately has to trust the financial advisor as they would a doctor. Fiduciary standards and thorough disclosure of compensation are needed to prevent this trust from being misused.
Maintenance of the suggested short-form disclosure documents should provide some safe harbor for advisors. We don't want overly rigorous compliance to price out good advisors. I believe the majority of advisors provide suitable investments. The moment of truth occurs when a suitable but expensive product is chosen due to compensation. The regulatory efforts should focus on suitable and "best interest of the client" product selection.