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How the SEC has pulled a vanishing act, looking the other way while brokers with flimsy pretenses hold themselves out as trusted advisors

The federal keeper of the standards has stopped battling brokers from calling themselves 'wealth managers', advertising 'trust' or looking the other way on principal trades

Author Guest Columnist Ron Rhoades December 17, 2013 at 8:05 PM
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Ron Rhoades: There was a time when the SEC was respected. No more.

Fiduciary Advisor Advocate

Fiduciary Advisor Advocate

December 17, 2013 — 1:07 PM

Sadly…I agree. It’s snowing outside and I was thinking about not going into the office today- rather work from home. After reading this- I am reconsidering and thinking about changing careers. Waiting for some regulatory body to enforce a standard of clarity and transparency will end up with ObamaAdvisor and be just as FUBAR as Obama Care. But that’s the government and outside of paying my fair share of taxes- candidly I don’t expect much.

But what really irks me is that we, as an industry, don’t hold one another to a standard. It seems, too many times, our industry actually supports deception- sort of like the advisor saying to the his/her client 'you’ve worked hard for your money now it is going to work hard for me’. Hey Advisor Dude or Dudette – IT’S NOT YOUR MONEY! Oh and least we forget when the Advisor is working for a plan sponsor, Trustee, endowment board member etc. the client is a fiduciary and the advisor needs to ensure the fiduciary responsibilities are carried out.

A number of years ago, Wall Street marketing executives made a seminal decision to change the title of ‘Broker’ to that of ‘Advisor’ or ‘Wealth Manager’. Perhaps considered a brilliant marketing move by a profit-seeking Wall Street, the change in professional title naming conventions can be best described as an elaborate shell game that continues to cause confusion for asset owners, investors and beneficiaries alike. Are the titles of Broker, Advisor, or Wealth Manager truly synonymous? The answer to this question needs to be understood as it fundamentally affects the manner in which investors, asset owners, and beneficiaries are serviced and charged. It also has meaningful repercussions to those that oversee assets for the benefit of others, i.e., to those that serve as a “fiduciary”. A re-examination of the differences, motivations and incentives is warranted.

“Tell me how a person gets paid and I can tell you how they will behave.”

In the meantime…I’m thinking about putting a plow on the front of my truck and do some snow plowing. it’s seasonal work but at least it is honorable!

Stephen Winks

Stephen Winks

December 17, 2013 — 9:44 PM
Years ago I surveyed the heads of all the major private client groups and found they all wanted to act in the client’s best interest, but only if they didn’t have to do anything different. In truth, their internal counsel is paid to support what they want to hear. If the answer is not what they want to hear, they will ask their counsel to come back with another answer. Thus the importance of Phyllis Borzi and the DOL—which actually must abide by ERISA, and not placate the industry’s self interest in negotiating away consumer protections, eroding public trust, in the name of harmonization.

The solution is not government regulation which has been compromised (harmonization) at the expense of the consumer. Ron Rhoades and Pat Mulvey correctly see the free market as the solution, where large scale institutionalized support for fiduciary standing unequivocally in the consumer’s best interest will prevail over brokerage self interest. BUT PRESENTLY, Such a definitive solution does not exist.

Thus the question, will a core group of interested parties, to include elements of those cited by Ron Rhoades, band together to create a new commercially viable expert business model that requires all participants to subordinate their self interest to the best interests of the investing public in ways clearly documented to the consumer. It is presently not possible in a brokerage format for a broker to have control over their cost structure, value proposition, margins and expert professional standing—but this is essential for fiduciary duty.

In the abstract, expert fiduciary standing makes sense but it is largely aspiration based on a very uneven understanding of fiduciary duty. But with a common understanding of fiduciary duty and thus professional standing, wouldn’t it be true that just a few advisors with $100 billion or more could redefine the industry in the consumer’s best interest, everything that has come before would be outdated. If the consumer had a choice, their best interests as defined by objective non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters would prevail every time. There is simply no option at the moment. So, are we waiting for?

I can think of a half a trillion in advisors who can change the world, but can they, or will they, work together in the best interest of the investing public bad on a common understanding that makes scale possible and streamlines cost ?

Isn’t it worth a try?

Compromised regulation (FINRA/SIFMA) in the industry’s self interest is not the answer—let the consumer decide if they prefer their best interests are to be served rather than the industry’s..


Michael Winkel

Michael Winkel

December 18, 2013 — 4:22 AM

Ron Rhoades writes a compelling piece on the misleading fiduciary standards of Wall Street. The information should shock us all. We are talking about our accumulated wealth and well being. Financial assets are the most important assets an individual owns outside of their and their family’s health. We are subjecting untrained people into distinguishing the real role their adviser is playing for them. It is my experience that even the very wealthiest of client’s are thoroughly misinformed about the nature of the role of their advisers. Most believe that the moniker’s coined by Wall Street are imposing a high standard of care on their advisers. Most advisers believe that they are actually acting in their client’s best interest as they have not read through nor understand the fine print of the agreements they have before their clients. Most advisers would not know that their clients are solely responsible for all of the decisions they jointly make and are responsible for the ongoing due diligence on all the products and programs the procure for their clients.

Those that manufacture and promote products, engage in investment banking, or profit from the trading activity will never be able to offer a standard of care that is appropriate regardless of the label we place on them. Those that only serve from the buy side will have to continue to carry the message that we are fiduciaries and hold ourselves to the standards that Ron so eloquently enumerates.

Jack Waymire

Jack Waymire

December 18, 2013 — 11:37 PM

Every month thousands of investors visit our website (www.PaladinRegistry.com) looking for advisors and information about advisors. One of their most frequent questions is the key differences between stockbrokers, planners, and financial advisors. Their perception is titles don’t matter because they all provide the same services. For this reason alone anyone who provides investment advice or recommendations should be a financial fiduciary.

This leads to another obvious conclusion. Stockbrokers provide investment recommendations (Series 7). Advisors provide investment advice (RIA, IAR). Not one investor knows the difference between recommendations and advice. And, they certainly don’t know the differences between a 7 licensed stockbroker and an IAR.

Expecting the SEC to do what is best for investors is like expecting politicians to do what is best for voters. Self interest drives politicians who sit on committees that control the budget and authority of the SEC. Check-out the amount of money these politicians receive from Wall Street companies. They are bought and paid for. The SEC will not provide protection that reduces the revenue and profit of Wall Street companies.

Any new regulations will be so watered down they will have no impact. The simple fact is Wall Street makes more money doing what is best for companies than doing what is best for investors.

Stephen Winks

Stephen Winks

December 19, 2013 — 1:31 AM

Jack and Mike,

Until there is a core group of advisors who in fact act in a fiduciary capacity based on statute, case law and regulatory opinion letters to include best practices (no retail trading desk or expensive packaged products executed in a brokerage format, legitimate investment policy statements, not profiles, advanced technology in support of continuous comprehensive counsel, modern approaches to portfolio construction, not flipping mutual funds etc., etc. required for fiduciary standing) there is no large scale institutionalized approach to expert advice essential for fiduciary standing. The roll-up are not doing it, nor are independent b/ds, nor are custodians. A big tent must be built from scratch that give advisors control over their value proposition, cost structure, professional standing and establish the consider5able transferable value of their practices.

This goes beyond a simple pledge or declaration. It requires an audit path statutory requirements and best practices which makes expert counsel scalable and the value of a practice transferable as it is based on prudent process not a person

As long as self proclamation is the means to professional standing—we will be disappointed in the wide range on variance in interpretation. There is powerful economic incentive for a rigorous standard, as (a) one can easily demonstrate professional standing (a CPA versus a book keeper analogy) in the consumer’s best interest, (b) critical mass is achieved maximizing margins at the advisor level, not possible in a brokerage format, (c) costs are streamlined in the client’s best interest as required for fiduciary standing, (d) practice valuation is maximized in terms of transferability, earnings and multiple, (d) technical competency and expert counsel is established and continually enhanced as a base point, not possible in a brokerage format which denies advice is rendered and no ongoing responsibility is entailed in recommendations..

There is everything to gain and nothing to lose. The only requirement is the subordination of the advisor to objective, non negotiable fiduciary criteria. This entails (a) expert prudent process with an audit path to statutory requirements that makes expert advice safe to acknowledge, (b) advanced technology that affords transparency, streamlines cost and continuous comprehensive counsel required for fiduciary standing, (c) work flow management tied to a functional division of labor (advisor, CAO, CIO functions) that makes advice scalable easy to execute and manage as a high margin business at the advisor level, (d) elimination of conflicts of interest not management through the disclosure of conflicts. Transformative industry innovation is achieved via the free market which advances modernity far beyond the technical competency/capacity possible in regulation.

I would suggest Pat Mulvey’s Fiduciary Advocate Advisors (FAA) built around the best intellectual capital available to top institutions is a very logical path to professional standing, scale, advanced technology and technical competency—presently not available in a brokerage format, roll-up or custodian. When substance trumps hyperbole a most compelling value proposition emerges that resolves much needed industry challenges by simply engaging the free market.

Let’s see how many advisors really want to be leading advisors acting in their client’s best interest.


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