August 24, 2010
Elizabeth Murphy
Secretary, SEC
Washington DC
Re: Study Regarding Obligations of Brokers, Dealers, and Investment Advisors
Ms Murphy,
About our firm.
Prior to a year ago we were affiliated with a broker-dealer. Today we provide fee-only services to more than 700 clients with more than $600 million in assets under management.
Fiduciary Standard for All Advisors.
As an investor, voter, citizen and Managing Director of a registered investment advisory firm, I find it difficult to justify anything different from a standard that requires an investment advisor to act in the best interests of the client and requires disclosure of all material conflicts of interest. The fiduciary standard should apply to anyone that provides investment advice to retail investors, not just to some advisors.
I find it inconsistent that certain advisors must simply provide suitable investments requiring them merely to meet client needs and timelines, and that those advisors have their first allegiance to the broker-dealer firm—and not to the client.
Rules and regulation should be written from the investors perspective and provide assurance that all advisors providing investment advice are subject to the same standard. There should be no confusion. A single, clear standard would help improve investor confidence that has been shaken over the last few years. In all likelihood, adoption of a uniform fiduciary for all advisers will result in better long-term outcomes for investors as well.
Who Should Regulate the Advisors?
As an advisor who used to be affiliated with a broker/dealer and who is now a fee-only advisor, I recommend two regulators. First, the SEC should regulate the registered investment advisors. (For small advisors, it should be the state.) The SEC already has the framework and experience dealing directly with advisors not affiliated with broker-dealers. FINRA should regulate the broker-dealers and their representatives. That portion of the industry is driven by product-oriented and commission-oriented businesses where complicated and potentially high-commission products are sold. Transparency, conflicts of interest and full disclosure of fees are much greater issues.
I believe it would be inappropriate for FINRA to provide overall supervision because FINRA is dominated by large broker-dealers and their self-interest rather than serving the clients interests first and foremost. In addition, FINRA has fought against the fiduciary standard for years. Why should they be expected to regulate properly under its future framework? It is doubtful that they could be expected to focus on providing clarity and proper disclosure. Instead, they might be expected to water down the fiduciary standard to satisfy its major constituents. .
These two recommendations are not meant to make it inappropriate for broker-dealers or their reps to offer proprietary or commission-oriented products. I favor legislation and regulations that would indicate that such products are not necessarily a violation of the fiduciary standard as long as there is transparency and full disclosure.
How Should Increased Regulation Be Paid for?
Fees for SEC (or state) supervision should be charged to the advisor so that adequate staff can be organized to provide appropriate investor protection. In the past, the SEC has not been properly funded to provide effective supervision.
K. Larry Hastie, M.B.A., Ph.D.
Managing Director
Retirement Income Solutions, Inc.
Ann Arbor, Michigan