August 28, 2010
Re the decision as to whether to require all financial professionals giving financial/investment advice to be fiduciaries vs meeting a suitability standard, here are some thoughts from an advisor with 30 years of insurance clientele, and approximately 125 clients who hold investments...40 of which own advisory investment accounts. I am compensated both by fees from advisory clients, and commissions from brokerage account or direct held mutual fund clients, as well as commissions from sales ofinsurance products. I take great pride in a clean 30 year compliance record, always trying to stay on the cutting edge of continuing ed and market and product related developments, as well as making a career by building good solid long term relationships with people who place their trust and confidence in me. My investment business is not of a significant scale to be able to operate as my own RIA, so I am a registered rep of my insurance company BD. With advisory clients we undergo an asset allocation program for client and BD protection so that client has an allocation proper for their situation. The plan custodian/Pershing takes a cost cut from client fees to cover their platform costs. So does the BD. While I much prefer to operate using advisory accounts, they are not profitable to me below $100,000 of client assets. I have no problem with the fiduciary standard when I use these advisory accounts. In the natural flow of business my insurance clients will come to me with less than $100,000 and indicate an interest in investing these funds. Below $100,000 I use traditional brokerage accounts or direct held mutual funds depending on client situation. A "C' share mutual fund comp allows me to assemble a portfolio very similar to what I could put together in an advisory account, and collect a similar fee. BD performs scrutinous suitability, and client is able to get good advice at an afforable cost on assets of below $100,000. My greatest fear of placing the fiduciary standard on all situations, is what happens to the investor with under $100,000? Everybody claims to be so concerned about protecting the "little guy" Well, the little guy is the one who will be abandoned here. And they want my help. Advisors simply won't be able to afford the lower net of offering advisory accounts below $100,000. This kind of customer doesn't have the deeper pockets to pay investment fees. And along with recent talk of limiting "C" share compensation reps will be even less likely to try to care for these clients. Under the suitablity standard with my BD I have annual continuing ed, regular licensing updates, and every case is scrutinized. I really don't see what adding another layer of regulation will create in the way of any positive impact for the customer, other than fewer of them receiving the help that they need more than ever in the wake of today's volatile markets. The average age of today's advisors is 50. More and more people claim to want help. How will forcing BD's and reps to take on more liability and expense do anything but lower the number of advisors? And where will newer advisors come from? Who will want to train them, take on their liability, and at increased cost? There are already standards in place to protect clients. Bernie Madoff was an RIA operating under the fiduciary standard and perpetrated the greatest financial fraud on his clients in history. You will never legislate away fear and greed. Advisors try to build their business by doing the right thing for their clients. What does "best interest" mean? Hindsight is always 20-20. When regulators look at the cases of unhappy investors, it is always from a "looking back" view at what has happened. We try to make the best decisions we can at the time we make them. My suggestion would be that rather than adding more costly regulation that ultimately will penalize smaller client accounts, that more effective enforcement of existing regulation would be best for all.