July 30, 2010
As a former SEC examiner and now state registered investment adviser, I have some pretty substantial background in this area. Although I would love to see a very strong stance taken with a true fiduciary duty obligation in the new law similar to that in the ERISA law, I don't think that is as important as the function of clearly communicating whatever the new law is to the clients. They need to have a full understanding of the level of care required to be taken by their service provider. On numerous occasions I have brought on new clients who were upset at their brokers because they never heard from their brokers, never had changes made in their accounts as their circumstances changed, but thought they were supposed to be getting on-going management in their best interest. The clients never even realized that the broker they used was under no obligation to be a fiduciary, had no obligation to make or recommend changes in their account, or even stay in contact with them. The point is, the clients had absolutely no understanding of the differences between a broker/registered rep and a registered investment adviser. They certainly didn't understand the difference between suitability and fiduciary duty and which financial service professional provided which standard of care. Once I explained it, they were pretty shocked by the differences. Therefore, it is of the utmost importance that the new rule regarding standard of client care clearly define all standards of care that will be acceptable going forward and mandate that this definition be provided to the client by the service provider at the onset of the relationship. For example, it can be included under a "Client/Adviser Standard of Care" heading in the Form ADV, Part 2, which should now be required to be distributed to any client who receives financial advice, regardless of the type of adviser (reg. rep., broker, RIA, etc.).
Now for a little more on the standard of care that I believe should be implemented for all financial services professionals who provide any advice to clients. There is a place in the market for purely execution based brokers who really shouldn't be held to a suitability or fiduciary standard. Such as an online broker. They should provide the best execution services to do it yourself investors and professional RIAs, like myself, with absolutely zero investment advice provided. All other financial services professionals who provide any amount of financial advice to a client should be required to meet a standard of care equal to that of a fiduciary as defined in ERISA. Let's not reinvent the wheel. Either you are selling a product that clients choose to buy on their own (no advice) for which you receive some form of compensation from the product sponsor or you are providing fiduciary advice for a fee paid directly by the client to the adviser. It is ridiculous to think that all conflicts can be controlled when doing both under one roof. It is even more ridiculous to think that a client can figure out when you are being a broker and when you are being an adviser. That means if you are a fiduciary, the client gets no proprietary products, no principal trades, no benefits whatsoever to the adviser or an affiliate beyond the advisory fees. On the flip side, if you are a broker who sells products for a commission (or similar arrangement), you provide no advice and collect a payment for executing/brokering a transaction.