August 24, 2010
The suitability standard governing broker-dealers and registered representatives is a heavily enforced standard. Compare it to how you see the fiduciary standard governing investment advisers is applied and enforced.
Compliance costs-both in terms of finances and time-are high, and those costs are eventually FELT by CLIENTS. Adding another layer of regulation means another layer of compliance, and even MORE COST TO CLIENTS and INVESTORS.
I am examined 4 to 5 times per year + suitability on every piece of new business submitted.
Our small firm prides its self on trying to be compliant.
However there is a great deal of paperwork is involved. I have a person who spends 35% to 40% of her time in my office whose sole job is keeping up with compliance.
The current compliance requirements between Prospectuses,Switch Forms, Disclosures, Applications, state Replacement Forms, etc. are overwelming at times to the Clients.
The liabilities of a fiduciary duty could mean increased costs and effect my ability to serve our clients.
I will be forced to increase the fee only model to protect myself from liability, and in times like these Clients do not need to pay increased fees?
Clients are at a point they do not nor can they afford to pay up front fees nor are they willing to do so when the last decade they've seen no growth in the stock market.
I can see where liabilities could drive up my errors and omissions coverage premium.
It will become increasingly more difficults to stay in the business let alone maintain three employees, if liabilities become too great?
As has been widely reported by the media, NAFIA played a leading role in working with Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) to include the SEC study in the recently-passed Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of the study is for the SEC to conduct the first ever comprehensive analysis of the regulatory environment governing broker-dealers and investment advisers and to determine if any regulatory gaps or overlaps exist that are harmful to consumers. Without the study, Congress was set to move forward with imposing a legal fiduciary duty on all broker-dealers and their registered representatives who provide advice to clients.
The study provides an opportunity for registered representatives to explain to regulators how the suitability standard is applied and enforced in the real world versus the fiduciary duty governing investment advisers. The goal of this effort is to give regulators their first ever look into how regulations trickle down from the SEC, through FINRA, broker-dealers, and then on to Main Street professionals like you.
While I believe I am already acting in the "best interest" of clients, the Act does not define what the rules are for compliance with a legal "best interest" standard - thus subjecting registered representatives to the potential of never ending lawsuits. For example, is "best" the cheapest recommended product? The "best" premium relative to the benefit of the product? The product with the "best" historic underwriting and service standards? Is it the one from the carrier with the "best" rating? The fiduciary standard in essence adds a vague legal liability standard that looks back (sometimes after many years) and is enforced after the fact by the SEC or trial lawyers who have perfect vision in hindsight.