August 27, 2010
I am writing to express my thoughts on the proposed fiduciary standard for broker-dealers and registered representatives. I believe that the current standard of suitablity is more than adequate to protect the investing public and feel that the fiduciary standard would create yet another layer of regulation which would be added to the already often burdensome regulations which we currently bear. In addition,the fiduciary standard would give rise to even more potential legal liability for the registered rep and B-D due to the vague liability standard of "acting in the best interest of the client". With the benefit of 20/20 hindsight, a plaintiff could nearly always find some deficiency in an investment strategy or recommendation which was not apparent at the time a recommendation is made. The increased liability will translate to higher errors and omissions premiums which are already expensive.
I have been Series 7 and life and health insurance licensed since 1985, Series 24 licensed since 1993 and have seen the amount of compliance requirements soar during my 25 year tenure in the business. In addition to the FINRA and firm level CE requirements which I must meet, I am subject to constant oversight with regard to the investments I recommend to clients. This not only occurs at the time recommendations are implemented, but are also reviewed in annual compliance audits by my broker-dealer. The B-D is also subject to inspection by FINRA and the SEC and periodically we have to provide copies of client files to the B-D for review by those regulatory bodies. The B-D audit usually envolves a day's worth of work prior to their visit to pull files and documents they will want to review and then a day for the audit itself, followed by a review of the audit findings and then creation and implementation of procedures to comply with any changes of regulations which may have been propagated since the last audit.
With many products that we recommend for our clients, there are separate forms which need to be completed just to determine and verify that the recommended product is suitable for the client's situation. Often there is duplication of information that is entered on multiple forms. These forms are also often copied to the client as well as the client's file. All this is expensive in terms of man-hours and materials. In situations where information is entered on multiple forms it really provides no added protection for the client. It just takes more time and materials. Certain products require extensive documentation as to the suitablility of a product to the client's situation and then is sent to the B-D for review. The principal reviewing these documents doesn't really know the client beyond what they see in the documents. The registered rep is the one who really knows the client and knows if the product is suitable. Sometimes, the B-D will reject a suitable investment recommendation because it doesn't meet some arbitrary guideline of policy that isn't flexible enough to take into account an individual client's situation.
The time spent on multiple, often duplicative, compliance issues takes away from time we can spend with clients. There are two registered reps in our office. We both have been in business 25 years. We have approximately 700 clients with varying amounts of assets under management. Our larger clients have several hundred thousand dollars invested with us while we also have many that are contributing $25 or $50 per month to an IRA. Our average account size is about $15,000. So, we serve many clients which are definitely lower or middle class people. We do this in a relatively rural area and as mentioned above have done so successfully for 25 years. This has all been done on a commission only basis. We feel that we are providing a valuable and needed service to a population that appreciates what we do. In all this time, we have never had a client file a formal complaint against us.
If the fiduciary standard is adopted, I feel it would be practically impossible for us to continue to operate on a commission basis which has served our clients well for all this time. The move to a fee basis would price our services out of range for many of our clients. These clients simply couldn't afford or would not pay the fees and therefore would be left without personal help.
Even if we moved to a fee only business model, the vague definition of a fiduciary standard is rife with gray areas which would leave much uncertainty as to what is the correct investment for a client. Increased EO insurance costs could be very burdensome and could potentialy be priced higher than I could afford. We would have to close the office.
The fee based business is not necessarily in the "best interest of the client". If a client pays a front end load on a mutual fund of 5.50% and a 12b1 fee of .25 per year, is he or she better off to pay a fee of 1.25% per year to a registerd rep? Not if they are going to be long term clients. There are so many mutual funds available in both the load and no load categories that you have many options from which to choose for meeting your client's investment goals. Over the long term, the commission based model is nearly always less expensive for the client.
Thank you for this opportunity to express my views on this very important matter. I sincerely hope that my comments will help you to see that the current suitability standard is not only adequate but the fiduciary standard could be damaging to a large segment of the investing public.