October 8, 2010
After careful review of all of the issues that I, as a reasonably informed private citizen and head of an investment advisory firm am privy to, Commissioner Luis Aguilar's thoughts on SEC oversight of investment advisers seems to make the most sense.
It is well thought out and addresses all of the primary issues. It is refreshing to see a public official who is so well informed about the issues and is not simply parroting an insignificant bit of research or sound bites given to him by a subordinate or a PR consultant.
Specifically, I believe that the majority of the criminal and fraudulent incidents that have occurred in relation to fee-based investment advisers would be solved by requiring proper custody of the assets. By "proper custody," I do not mean that an investment adviser creates a sister company, a controlled entity, or their own broker-dealer to custody the assets of their clients. Fee based investment advisers - who are required by the '40 act to follow a fiduciary standard - should be required to custody assets elsewhere - in qualified custodians that are in NO WAY affiliated, owned, or influenced by the investment adviser - and who also provide account statements directly to the clients or their representatives. Had this rule alone been in place, most of the ponzi schemes would not have happened.
I, for one, have no fear whatsoever of absolute and total disclosure of all sources of income, commissions, fees, or other financial benefit that our firm receives. Frankly, most clients understand the costs of doing business. They understand that people must be paid, overhead must be maintained, technology must be continually updated, and benefits to employees must be provided. I urge Congress to be bold in their actions. Require that ALL financial advisors - anyone who even hints that they give financial advice of any sort, for ANY compensation - be it commission or fees - including insurance agents who hold themselves out to be financial advisors but whose sole income is product and commission based - be held to a fiduciary standard.
Other countries, including Australia, have this standard. Proper funding of the SEC would prevent the necessity for an SRO and prevent the gross conflicts of interest, mismanagement, and bullying of firms that already exists within FINRA. Having yet another privatized firm whose income is generaged from dues of its members - and fines it levies upon those members - would be an abomination to an industry required to conduct itself in a fiduciary manner, given the inherent conflict of interest the SRO itself would have.
I eagerly await the outcome of this monumental task you have undertaken. The very future of the financial planning profession depends upon your sound judgment.