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Debate continues: Fiduciary standard no panacea

Financial Services Institute advocates for study, deliberate look at investor protection

Author David T. Bellaire, Guest columnist May 6, 2010 at 6:30 AM
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David Bellaire: Improving regulatory examination and enforcement for investment advisers and broker-dealers is more complicated than changing the responsible regulator or throwing money at the problem.

RIA Compliance

Mark Kennedy

Mark Kennedy

May 6, 2010 — 10:55 AM

Stop stalling Mr. Bellaire….your arguments only serve to support the immediate application of a “fiduciary standard”...Johnson-Crapo (what a name!) can dialogue until the cows come home, but cut to the chase, impose the FS standard, and you will witness a sea change in the behavior of the broker/insurance/advisor community….the speed will be breathtaking, and self imposed…this perspective comes from a 25 year veteran financial services professional who highly values applying fiduciary principles in serving clients…by the way, applying fiduciary is not complicated whatsoever, although it can be very expensive if you run afoul!!

Jan Sackley

Jan Sackley

May 6, 2010 — 12:44 PM

Investors’ understanding of the standard of care owed to them by their chosen financial advisor must be improved. As previously shared with Congressional committee members and in other comments and articles, an immediate change that can be made would be to prohibit those who do currently owe a fiduciary duty from calling themselves “advisors”, “counselors” or other titles that imply an obligation to the customer that rises to the level of a fiduciary. Yet no regulator, including FINRA, has floated such a change for comment even though the confusion and misunderstandings created by these titles has been discussed for years.

If broker-dealers are fretting about possibly having a fiduciary standard imposed, they should recall that they created this problem by using advisory titles and advertising in a manner that implied they were looking out for the clients best interests. If you imply it, then you should expect to be held to that standard.

Yes, there is a challenge to the existing business models, but any smart broker-dealer has been thinking through those challenges as they have been raised repeatedly over the past 18 months and intensely over the past year. I applaud the effort to move all advice givers down the path of the fiduciary, but at the same time, like Mr. Bellaire points out, I strongly believe that consumers must have choices. There must remain an option to select investments for oneself without someone questioning your choice (assuming that products do not have hidden conflicts, a fairly straight forward concept when buying a stock but less so with mutual funds, derivatives, annuities, etc). One must question why the suitability standard is imposed on an on-line broker who does not advise customers. For example, see a piece from last year http://bit.ly/12Clrd I would advocate for the elimination of the suitability standard for certain account types: Such a category of investment service would actually provide regulatory relief to those discount brokers who don’t sell any product, yet are expected to gather asset and income information from consumers in order to ascertain whether the individual is qualified to buy certain types of assets (options, futures, etc.) If the service provider isn’t permitted to present or sell products to sway the consumer, why should we care what the consumer decides to buy? In a free society, the consumer should have the ability to choose how to spend his or her money. We ask more invasive questions and require more financial information from a person who opens a $5,000 brokerage account than we do from someone who spends $40,000 to buy a car.

If you care to learn about the fiduciary standards required of bank trust departments that manage money, a topic with virtually no attention in this debate, see a recent piece I wrote for the National Society of Compliance Professionals: “The Duties of Trustees and Other Fiduciaries. Will Trustees Set the Fiduciary Standard?” http://bit.ly/Duties

Jan Sackley, CFE

Fiduciary Foresight, LLC

Risk and Regulatory Compliance Consultants



Jan Sackley

Jan Sackley

May 6, 2010 — 12:47 PM

Note to above comment, the second sentence should say “...those who do NOT currently owe a fiduciary standard…”

Stephen Winks

Stephen Winks

May 6, 2010 — 4:33 PM


There is so much here that could be characterized as brokerage lobby misinformation which must responded to.

The Financial Services Institute’s focus has put the best interest of the brokerage industry ahead of the best interest of the consumer by removing the Dodd Bill provision which would hold brokers to a fiduciary standard of care by incerting the Johnson-Crapo amendment which directs the SEC to study fiduciary issues again after 70 years of study. Essentially, by Johnson-Crapo directing the SEC to study, Congress is withholding legislative authority from the SEC to establish, regulate and enforce fiduciary standing of brokers, crippling the industries ability to create the necessary enabling resources necessary to support fiduciary standing.

The majority of brokers, all consumers and three of the five SEC commissioners support brokers being held to a fiduciary standard of care. The FSI simply does not want to responsibly fulfill its obligation to support fiduciary standing with the necessary enabling resources which would safely bring fiduciary standing with in the reach of every advisor.

Let’s go point by point.

1. Standard of Care: The caveate emptor or buyer beware suitability standard is woefully inadequate as illustrated by the Goldman Sachs congressional testimony. There is nothing illegal, but is it ethical. Your suitability standard does no call for any ongoing accountability for investment recommendations. There is no requirement for you to address the important issues of cost, risk, return, tax efficiency, liquidity, etc essential for the client’s success. Most importantly, you do not even acknowledge that advice is being provided and certainly provide no support for advice. The role of the broker is simply to make client’s aware of their investment alternatives, it is up to the consumer to determine investment merit on their own, regardless how limited their invesyment knowledge and experience may be. You are absolutely correct the investors understanding of the care provided must be improved (to be discussed later). This is not accomplished by the SEC studying, but by the brokerage industry being accountable for (a) acknowledging its brokers render investment advice that IS NOT incidental to trade execution, but trade execution is incidental to advice, and (b) the level of advisory services support it provides it broker. Two points you failed to mention.(c) As for raising the conflict of some advisors being more capable than others, that is a quality assurance problem the FSI can address by requiring the creation of the enabling resources that can support the full range of advice (transactions, planning, consulting, fiducuiary standing).

2. Other Regulatory Requirements: Surely you are not serious about either point:
(a) Do you really believe the present qualifing exams establish competency. The exam preparation firms and materials say it establishes minimum proficiency. Importantly, given there is no accountability for investment recommendations or for managing investment and administrative values essential to the consumer’s success in a suitability standard, aren’t you saying you are putting every broker in the business in an untenable position of wanting to act in the client’s best interest but you prevent them from doing so by virtue of your purposefully limiting of training. Why is it a violation of the internal compliance protocol of every brokerage for for advisors to acknowledge their fiduciary duties of acting in the consumer’s best interest? Isn’t it grossly disingenous to establish competency as an issue when you do not support your brokers in acting in the client’s best interest?
(b) You are comparing apples and oranges when you cite thousand broker brokerage firms and individual advisors. There is a reason why brokerage firms have a net capital requirement, must participate in SIPC and carry a fidelity bond.

3. Examination Enforcement: Apples and Oranges again. The SEC examines half of the 4900 brokerage firms each year, but how many of the 358,000 brokers does it examine each year? None. Ten percent of advisors are examined each year. Given the materially higher level of accountability and counsel advisors provide, there is general agreement in the observation that advisors have far fewer problems than brokers. The adoption of a fiduciary standard would materially mitigate compliance problems which account for 12% of brokerage revenues.

4. Different levels of service for different clients: You are absolutely correct, advice is not homogenous. The client has at least half the say about the depth and breadth of the advisory services relationship they have with their advisor. There here are actually five levels of investment and administrative counsel a consumer can avail themselve to. This hierarchy of advice is comprised of (a)DIY investors who require no advice, (b) transactions relationships where the brokerage maintains maintains no advice is provided or supported, (c) a financial planning relationship which is needs based selling geared to fulfilling a need like retirement or education, unless it is continuous and comprehensive in nature constituting fiduciary standing which is technologically beyond the reach of 99% of planners, (d) investment management consulting relationship where brokers sell advice as a product, and (e) a fiduciary relationship where advisors manage advice as a prudent process. As long as the consumer and advisor have an understanding where they are on the hierarchy of advice there is no room for misunderstanding and there a bias toward developing a deeper and broader client relationship as clients will allow. The key here is for the FSI to advocate on behalf of the consumer that the necessary enabling resources to support fiduciary standing are safely brought within the reach of every advisor so they can act in a fiduciary capacity as their clients will allow. But that is clearily not your intention wth Johnson-Crapo. Literally every client prefers their advisor to act in their best interest and only in their best interests—thus, there would be a bias toward fiduciary standing as well.

There is no tinkering around the edges here, everyone knows what needs to be done, the Johnson-Crapo Study, is an attempt to make fiduciary standing negotiable, when specific fiduciary duties entailed are a matter of fact based on statute, case law and regulatory opinion letters that are non-negotiable.

The FSI’s interest in negotiation, clearly establishes it is putting the best interest of the brokerage industry ahead of that of the consumer. Your constituency of independent broker/dealers are working at cross purposes with the consumers and the advisors they support.


Brooke Southall

Brooke Southall

May 6, 2010 — 5:37 PM

Steve brings out an interesting point in his comments.

What about an advisor’s accountability for an investment recommendation under the suitability standard after it has been executed?

Ron Rhoades also mentioned this point in his column yesterday.

I don’t believe I’ve ever heard the pro-suitability crowd response to what care is owed post-transaction. This strikes me as a factor that gets conveniently left out of the discussion.

It reminds me somewhat of the thinking my bank uses when I ask for a loan. They want to know if a I have a job with a salary sufficient to cover my mortgage payments. They seem utterly unconcerned if I think I’ll quit my job tomorrow.

The importance of making the right decision based on a snapshot in time is odd — especially in these volatile times.


Skip Schweiss

Skip Schweiss

May 6, 2010 — 5:45 PM

I thank Mr. Bellaire for taking the time to present his thoughts, and to RIA Biz for providing us this forum for debate.

Much has been said already in response to Mr. Bellaire’s piece, and I won’t be redundant. I did think it worth pointing out that Mr. Madoff was a broker since 1960, and became an RIA in 2005. If my math is right, he was thus a broker for 48 years, and an RIA for three. He was examined many times over many years by NASD/FINRA. To say that he pulled his caper under the shingle of an RIA is a bit disengenuous, I’d say.

lonny coop

lonny coop

May 25, 2016 — 11:14 PM

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