August 2, 2010
The SEC has formally announced that it has begun a 30 day public comment period regarding its study examining the effectiveness of regulations governing broker-dealers and investment advisers. Following the study, the SEC has the discretion to impose a legal fiduciary standard on broker-dealers and their registered representatives unless the public comments convince them otherwise. The premise behind the effort is based on the perception that the legal fiduciary duty governing investment advisers provides greater investor protection than the suitability standard governing broker-dealers.
I disagree that the fiduciary standard has protected consumers better. Basically, the fiduciary standard looks back and enforces breaches retroactively through SEC enforcement or private lawsuits. The suitability standard looks forward and tries to prevent harm to consumers through ongoing and frequent FINRA and broker-dealer audits and compliance processes.
I currently am regulated enough
The suitability standard governing broker-dealers and registered representatives is a robust and heavily enforced standard.
Compliance costs-both in terms of finances and time-are high, and those costs are eventually felt by clients. Adding another layer of regulation means another layer of compliance, and even more cost to clients.
I currently hold a series 7 and 65 license and I do engage in managed account business. The ADV is written by attorneys and is so confusing that clients rarely read and understand all of the information. If we want improvement, have a all encompasing document written by the lay person investor.
If more advisors move to a fee only environment, our client base will dwindle. Clients that most need the advice won't or can't pay for advice.
The Act does not define what the rules are for compliance with a legal "best interest" standard - thus subjecting registered representatives to the potential of never ending lawsuits. For example, is "best" the cheapest recommended product? The "best" premium relative to the benefit of the product? The product with the "best" historic underwriting and service standards? Is it the one from the carrier with the "best" rating? The fiduciary standard in essence adds a vague legal liability standard that looks back (sometimes after many years) and is enforced after the fact by the SEC or trial lawyers who have perfect vision in hindsight.
Commissions or recommend that the client purchase a proprietary product doesn't automaticially mean that a customer has been damaged or taken advantage of. Often times we will see clients that have products in place that don't need to be changed or adjusted. Lots of companies have lots of great products - and most of the time the agent that sold the product is a captive agent who earned a commission and the consumer is better for it.
Please continue the efforts to rid the industry of bad agents and brokers. Most of us do the right thing every day with every client. We work hard to earn trust and personally, I feel a great responsibility to care for those that have entrusted me with their financial lives. Support those of us that are doing a good job and make the penalities swift and severe to those that aren't.
Gene L. Elder CFP®