August 24, 2010
The suitability standard governing broker-dealers and registered representatives is a robust and heavily enforced standard. Compare and contrast 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.
o Discuss the specific licenses you hold and what is involved in complying with each license.
o How frequently are you examined?
o Give specific examples of how much time you (or someone in your office) spend on compliance. How much paperwork is involved? Have you had to hire someone into your office whose sole job is keeping up with compliance?
o Are there areas of compliance that do not add any consumer protection in your view?
o How do the compliance requirements impact my ability to serve my clients?
The liabilities of a fiduciary duty could cost a great deal for my clients.
o Will I be forced to a fee only model to protect yourself from liability?
o Will moving to a fee-only model result in better, unbiased advice?
o Can your clients afford to pay up front fees or will they be willing to?
o Will the liabilities drive up my errors and omissions coverage?
o Will I stay in the business if liabilities become too great?
The Dodd-Frank Act permits the SEC to require that all broker-dealers be held to the same legal fiduciary requirement investment advisers have when providing advice to clients. Should the SEC choose to use that authority, the fiduciary duty as defined by the Dodd-Frank Act would require that all broker-dealers be held to a legal and vaguely defined standard "to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice."
While NAIFA members believe they are already acting in the "best interest" of their 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.
Fortunately, due solely to NAIFA's vigorous efforts, the duty as defined by the Act does include some key limitations that prohibit a regulator from holding a registered representative in violation of the "best interest" standard simply because they receive a commission or recommend to the client to purchase a proprietary product.
PLEASE do NOT impose a misguided fiduciary standard on me.
I pride myself in my ability and effort to provide the BEST I can for my clients. BEST is whatever fits their needs when they have them, determined only by them. Please help me keep it that way. I love the idea of protecting consumers from the unethical so-called advisors out only for themselves. But this would be such a harsh penalization to the financial professionals dedicated to doing this the RIGHT way becuase its the RIGHT thing to do.
Thanks for listening.
Danny Richards