The comments have come streaming in on how a new fiduciary standard should be harmonized now that the Securities and Exchange Commission have been given the green light for its study.
As it stands, investment advisors (or advisers) are fiduciaries while broker-dealers may or may not be, based on the circumstances of their relationship with particular clients. Investment advisors want the single, one stringent standard of care applied to everybody but the broker-dealers say suitability is enough.
Of course, the SEC is now assigned to study the big picture. While everyone assumes harmonization is on the horizon, the large broker-dealers are lobbying hard to fashion a standard they can live with.
Just take a look at what the big brokerage firms are saying in their comment letters. Realize this. They aren’t welcoming a blanket standard at all and they want to protect business the way it is.
Consider what Robert McCann, the chief executive officer of UBS Wealth Management Americas, said in his Aug. 30 letter. “While we believe that some investors are well served by single-service investment advisers, many investors appropriately choose multi-service securities firms that provide a much broader array of products and services under one roof than most investment advisers can provide.”
McCann goes on to say: “Nothing should be done to discourage investors from continuing to choose that more comprehensive model so long as investors are informed of the conflicts that arise in multi-service securities firms, are aware of multiple streams of income for different services, and are informed about how conflicts are managed.”
McCann takes another swipe at his opponents in this regard. He writes: “In seeking to protect investors. . .the Commission should address the current under-regulation of investment advisers relative to the existing regulation of broker-dealers.
Independent giant, LPL Financial, in its comment letter, says it is “concerned that subjecting broker-dealers to a fiduciary standard without addressing the regulatory disparities could lead firms and individuals to give up their broker-dealer and registered representative licenses and offer advisory services exclusively.. . There is also a potential to limit access to product[s] or services if brokerage services are not available.”
David M. Carroll, senior executive vice president for wealth, brokerage and retirement at Wells Fargo, is equally direct in his comment letter for his firm. “The adoption of a uniform standard of conduct does not, and should not, require that all broker-dealers become investment advisers or that an investment advisory relationship be identical to a client's relationship to a broker-dealer providing investment advice,” Carroll writes. “Clients have chosen to use broker-dealers because broker-dealers provide services, products and compensation models that clients want. Requiring broker-dealers to register as investment advisers, thereby subjecting the entire broker-dealer business model to the Advisers Act, would greatly reduce the available account types, products and service options while increasing costs for certain clients.
In the end, crafting a new standard is supposed to provide greater protection for investors. However, with 2010 more than half over, notice that breach of fiduciary duty claims top the list of complaints in FINRA arbitration disputes. Some 1,920 charges of this type were filed to the self-regulatory agency through July of this year. Claims of unsuitability, meanwhile, came in seventh at 1,147.
So, if clients are unhappy with their investment results, they will go after both the firm and the advisor under either theory, which says some duty of care, was violated or not adhered to in the appropriate manner.
The real issue comes down to clarity.
According to a survey conducted in April by Envestnet Inc., a Chicago-based provider of services for financial advisors, some 63% of wirehouse advisors polled say that, to the best of their knowledge, all financial advisors are subject to the same obligation to act in their clients' best interests.
Fewer than half of all advisors in the survey said they were "very well prepared" to act as a fiduciary in the following scenarios:
* Developing a full view of the client's life goals and/or financial situation (47% total and 44% wirehouse)
* Development of an investment policy statement (36% total and 29% wirehouse)
* Maintenance of that policy statement (33% total and 25% wirehouse)
* Ongoing client communications (46% total, 45% wirehouse)
* Updating the financial plan for changing circumstances (44% total and 42% wirehouse)
* Disclosure of investment costs (45% total, 42% wirehouse)
* Disclosure of fees (49% total, 40% wirehouse)
What's more, 63% of all advisors responding to the survey said they wished their firms would give them “a roadmap or checklist on how to fulfill” their fiduciary obligations.
At the same time, Envestnet also discovered that the investors who were also surveyed are just as confused as advisors about the fiduciary standard. Only 36% of investors say that all advisors must meet the same obligation, and 73% of investors say that they are either not very familiar or not familiar at all with the debate.
For the SEC, the real triumph will be coming up with a standard that clearly explains to investors, the firms and the advisors what the responsibilities are for all advisors no matter what part of the industry they hail from.