August 30, 2010
I appreciate the opportunity that the SEC offers to investors and members of the profession to comment on the study on the proper oversight of brokers and registered investment advisors (RIAs).
I established my RIA firm in 1996, and worked for an RIA firm for three years prior to that.
I have always served a fiduciary role for my clients. I believe that this is clearly in my clients’ best interest, and I believe that, if investors understood the difference between fiduciary standard and broker standard, they would select a professional that adopts a fiduciary standard in a heartbeat. Wouldn’t you?
The argument reminds me of the medical profession. There are very well educated pharmaceutical salespersons, who know well what their company’s products can and cannot do. And yet we do not permit them to dispense prescriptions? Why? Because of the obvious conflict of interest.
The AMA and FDA recognizes that this conflict of interest, whether understood by the public or not, is too dangerous to permit. They could permit it, but require that the salespersons disclose the conflict. The AMA and FDA don’t do this, for they recognize that such disclosures are rarely effective in overcoming a good salespersons’ skills, and that it is clearly in the patient’s best interest to have medicine dispensed by professionals who do not economically benefit from the selection of which medicine to dispense.
Why do we permit financial product salespersons, with an inherent financial conflict of interest, to dispense these products?
The reason to separate financial product salespeople from advice dispensers is the magnitude of the incentive to mislead the consumer. There is currently too much financial incentive for brokers to recommend products that serves their employer (the brokerage firm) more than it serves the customer.
The simplest dependable solution is to require adherence to the fiduciary standard for all providers of financial advice. Fee-only™ advisors have worked under this model for decades.
My last point is to strongly encourage that you leave the monitoring of this to a non-self-regulatory organization (non-SRO). Industry SROs such as FINRA are too industry-biased. This was made clear in the related area of mandatory arbitration, where the arbitration venue was clearly too industry-biased.
For years I have bragged to my clients that I am regulated by the SEC, whose mission is to protect consumers such as each of my clients. This is a wonderful design that should be perpetuated.
Thank you for continuing to safeguard investors from those who dispense financial advice, including my firm.
Paul S Baumbach, CFA, CFP(R), ChFC