August 7, 2010
Reference: SEC Study
I stand adamantly opposed to the harmonization of the 1934 Securities Act and the 1940 Investment Advisers Act, and the imposition of a Fiduciary Standard of Care--there was a reason that a "wall" was placed between the Broker/ Dealer (Registered Representatives) and the Investment Advisory communities many decades ago--before that "wall" is torn down--and produces a series of unintended consequences, mass confusion, and disruption of the marketplace--it is always good to revisit why that "wall" was erected in the first place.
It recognizes that their is a significant difference between those that sell financial products to consumers on a commission basis--and those who sell advice on a fee basis--consumers should always be the final arbiters and have freedom of choice on how they access and pay for financial products, investment advice, and services.
I have been in the insurance and financial services profession for 37 years--and hold a Series 6,7,22,24,63,65 Registrations, as well as Life, Health, and Variable License lines of authority in my resident state of NE and nearly 30 non-resident states.
I would submit that the Suitability Standard of Care is a more robust and rigorous regulatory system than the Fiduciary Standard of Care--a Suitability Standard deals with the objective client facts, such as income, net worth, liquid net worth, tax bracket, risk tolerance, investment objectives, holding period, and investment experience--this information must be kept current every 3 years---there is no room for mischief, such as in the Fiduciary Standard, which is an amorphous,undefined,and non-uniform standard that is based on a legal relationship between the client and adviser, is very subjective, and is process-oriented, and provides great latitude and discretion to the adviser.
Under the compliance associated with the B/D Suitability Standard--we are subject to annual examination via the annual face-to-face compliance meeting, desk audits, a firm element(CE) every year, and a regulatory element every 3 years---contrast that to the Fiduciary Standard, whereby examinations are conducted about once every 10 years. In addition, the sheer number of required disclosures as part of the application process for a client to acquire or implement an Insurance or Investment Product is numbing and causes client confusion--they do not have the time or patience to read, review, and comprehend the avalanche of diclosures, which work only to undermine the process and serve as a deterrent to taking action--they only come to me because they want a problem solved, a financial need satisfied, or a financial goal they wish to achieve--not to have a mountain of paperwork to complete, which is a barrier to doing business.
In our office, we spend about 2 hours per day dealing with various compliance matters, which is costly and it takes one of our staff(who is required to be finger-printed as an associated person) about 2 additional hours per day to handle additional compliance requirements, including separation of color-coded filing system separating client files by insurance and investment product lines and services, opening mail and recording checks and securities received in a daily log, pre-approvals of all business cards, letterheads, signage, DBA's, advertising--both print electronic-- seminars,reporting outside business activities--,maintianing detailed documentation of all client meetings and discussion/action points, documenting all communications --written or via Email, which is monitored by the B/D and copied to the Supervising Registered Representative.
There should be some cost/ benefit analysis performed on the intrusiveness of these extra daily activities into our daily business flow that are an uneccessary exercise and time-consuming and have no meaningful protections for consumers for those intent on doing harm or engaging in unlawful activities.
The Fiduciary Standard, as a "one size fits all" and cookie-cutter approach to the investing public will raise the cost of doing business and disenfranchise the middle and lower-income markets from access to advice, products, and services--it will escalate the liability exposure on the front-end of a client engagement--and leave the potential for indefinite open-ended liabilities and legal action--resulting in increased Errors Omissions premium costs . Most of the middle and lower income markets have no appetite for paying under an on-going fee-for-service arrangement for advice with such fees being deducted on a quarterly basis from the investment portfolio --they prefer to pay a commission per transaction on the front-end, in order to cap and maintain control over their advisor costs.
There is no body of evidence today that indicates a Fiduciary Duty Standard of Care is a higher level of care than the Suitability Standard of Care--instead it leaves too much room for subjective, flexible, and discretionary manuevering to adequately protect consumers--as contrasted to the objective, fact-based, and total disclosures under the Suitability Standard.
Again, I urge you not to harmonize the 1934 and 1940 Acts and impose a single Standard of Care, which would have a detrimental impact on those middle and lower income market consumers for whom the protections are being sought and putting out of reach due to pricing access to advice, products, and services due to higher investment advisory fees that will create an economic hardship on these important market segments.
Thank you.
Terry K. Headley--NAIFA-President-Elect