August 26, 2010
I am in favor of the fiduciary standard for any professional who provides advice to clients in the purchase of a financial product or in connection with providing financial planning advice. Sec 919C of the Dodd-Frank financial reform bill provides for the following study:
"In general (a) The Comptroller General of the United States shall conduct a study to evaluate—
(1) the effectiveness of State and Federal regulations to protect investors and other consumers from individuals who hold themselves out as financial planners through the use of misleading titles, designations, or marketing materials
(2) current State and Federal oversight structure and regulations for financial planners and
(3) legal or regulatory gaps in the regulation of financial planners and other individuals who provide or offer to provide financial planning services to consumers.
(b) CONSIDERATIONS.—In conducting the study required under subsection (a), the Comptroller General shall consider—
(1) the role of financial planners in providing advice regarding the management of financial resources, including investment planning, income tax planning, education planning, retirement planning, estate planning, and risk management"
Thus, Congress has already recognized the difficulty consumers have in sorting out exactly who is qualified to give advice and the need for consumer protection. Consumer protection is about helping consumers get the proper advice that is in the best interest of the consumer. The "suitability standard" does not meet the benchmark of best interest of the consumer. A financial product may be suitable for an individual but it does not mean it is in their best interest to make the purchase and it does not mean that the consumer is getting a cost effective product. A fiduciary standard would require an advisor to establish that the advisor's recommendation is for the best interest of the consumer, not merely that it is "OK" if they purchased a product.
In the August 23rd issue of Investment News, the opponents of the fiduciary standard make several points. First they say the suitability standard is "robust and heavily enforced". I disagree that the standard is robust. The suitability standard only applies at the moment of the sale and does not require the advisor to monitor the recommendation even though the consumer may still be a client of the advisor. This is hardly "robust". Even if the suitability standard is "heavily enforced" (which is a suspect claim given the rampant problems with improperly sold annuities over the last several years), the point is that enforcing a standard which does not protect consumers is of no value. The NAIFA action memo states "tell them you are regulated enough" As a partner in a fee only firm which is governed by the fiduciary standard, the issue is not about more regulation because the fiduciary standard does not create more regulation. It will, however, create a different regulation for brokers. Thousands of fee only advisors are ready to accept federal regulation which requires the fiduciary standard for all advisors, not just registered investment advisors or fee only advisors who are independent of a broker dealer. NAIFA is essentially saying there in no reason to act in the best interest of the consumer because it will cause NAIFA members more work.
You will certainly receive more letters from brokers than fee only advisors. This is natural because the fiduciary based advisors, while growing in number, do not have the scale and marketing muscle of the brokerage industry. I am confident that the SEC's decision will be based upon what is best for the consumer instead of how many letters one group or another submitted. The concept of consumer protection is now built into the legislative framework surrounding the financial services industry. The fiduciary standard is essential for consumer protection. Brokers and fee only advisors must both adhere to the fiduciary standard in order for improved consumer protection. It is that simple.
Mark J. McCandless