July 30, 2010
After attending MIT and spending 20+ years in the high tech industry, where we had to be efficient and smart to run a successful business, I am appalled at the drag - finanacial and manpower - put on my clients, my firm, and myself in trying to meet already onerous regulatory burdens. And now Congress is looking to make them more difficult, likely increasing costs to clients and advisors, possibly making it difficult for consumers of modest means to obtain advice without substantial up front costs. All the regulation already in place has not proved capable of protecting consumers against charlatans, what makes anyone think it is going to change by adding a fiduciary standard? There are already strict suitability standards in place that are intended to protect consumers.
The bottom line code is really quite simple - clients' interests come first and all information should be disclosed, so they are making an informed decision. Do all advisors follow this code? Absolutely not. Do the onerous regulations help prevent them from violating the code? Absolutely not. Will making the requirements more onerous and confusing help that situation? Absolutely not.
Because the regulations are so complex and no individual can possibly keep track of all the requirements, we now have to have a staff to keep track of that and implement processes to insure no one violates a simple code. Does that protect consumers? Absolutely not. It makes it more confusing for them, the compliance costs that the system has to bear increases their fees and decreases their realized return, only contributing to the problem these regulations were intended to solve.
Some regulation is clearly required, but does any rational human think that we don't already have adequate safeguards in place, with multiple agencies and commissions already responsible for protecting the consumer? Has the consumer been protected from misleading practices and fraud as a result? Clearly not. So what makes anyone think that adding more requirements will change that situation?
Caveat emptor has applied forever and will apply forever. People need to be made aware that not everyone is honest and they should do their due diligence in finding an advisor. They shouldn't assume that because there is financial regulation that they are safe - they are not, no matter how much regulation there is. A clearinghouse of customer feedback on advisors, available online for consumers to view - that's something I could support. Even a standard engagement script that makes it crystal clear how the business relationship is structured, that they and the advisor have to sign and agree to is reasonable. Once that is done and the ground rules are laid, everyone knows where they stand and how to proceed to make sure their interests are protected. This is no different than any other lesser-regulated industry. When I worked in high tech, I had to prove to my customers that what I was recommending and trying to sell them was going to help them - when I did, they bought. It's no different here.
The fiduciary standard is vague and one that may make it more difficult for people of modest means to get advice.
It's pretty simple - "Mr. Customer, once I put a strategy in front of you that makes sense to you and you see how it will improve your world, all I ask of you is that you place the business through me and the company I bring the business to will compensate me for my time and effort. Yes I get paid to sell these products, and I have a point of view, and you need to know that. But by doing so, it makes advice affordable to you. Otherwise you would have to go and pay an advisor potentially thousands of dollars for his/her advice. Is that something you are prepared to do? My goal is to educate you why the product I am recommending is the best option for you in your specific situation. You should feel free to seek other opinions and advice so that you are comfortable that what I am recommending is right for you. I welcome any questions or concerns you have - my goal is that you make an informed decision, because if you are informed I'm confident you will see the wisdom in what I am offering. If you are not comfortable with that engagement process, I encourage you to seek out a fee for service advisor. S/he will charge you a substantial hourly rate, without necessarily ever ensuring that you take action on his/her advice that will actually improve your situation. If that is an arrangement you are more comfortable with, by all means I encourage you to seek that out."