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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

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

Brooke’s Note: As you read this article, a sickening realization may come over you — that the SEC and all it stands for is withering away — not that it was ever a paragon of stewardship. The evidence, as Ron points out, is everywhere, not deep in Dodd-Frank or some other government tome. This article follows up, ironically perhaps, Ron’s ambitious series of stories mostly targeting the SEC’s would-be replacement for RIAs that concluded with What the 8 pillars of a FINRA-replacing entity for RIA oversight look like and how personal accountability is key. According to him, the SEC, by its inaction, has all but taken itself out of the game. Now, it’s time for the industry itself to step into the breach. Here’s what that would look like.

There was a time when the Securities and Exchange Commission cautioned that brokers who established relationships of trust with their clients, and who provided personalized investment advice, were fiduciaries with broad duties related to accountability and putting the client first.

Yet today, curiously, the federal regulator wonders if it should even impose any kind of fiduciary duties upon brokers who provide personalized investment advice. See: One-Man Think Tank: SEC courage likely to be tested in coming months.

There was a time that the SEC cautioned against the use of titles that denote relationships of trust and confidence.

Tomato, tom-ahto, broker, financial advisor

Yet today the SEC permits anyone to use the terms “investment manager” or “wealth manager” or “financial advisor” or “financial consultant,” without regard to the reasonable belief created in clients by the use of such titles that expertise and trust can be reposed.

There was a time when the SEC cautioned broker-dealer firms to be careful in their advertising, and to not imply a relationship of trust and confidence exist when, in fact, such does not. Yet today such advertisements are abundant.

There was a time when the SEC noted that principal trades by fiduciary were only to be a rare activity, undertaken only in markets where agency trades were not available. Yet today the SEC has permitted dual registrants to engage in principle trades on a wholesale basis, without proper inspection and oversight.

There was a time when core fiduciary duties could not be waived. Yet today, many major broker-dealer firms’ Form ADVs, Part 2A state, to the effect: “We are fiduciaries … but … and but … and but … and but.”

Be one with your 12(b)-1

Wall Street firms now often say, in essence: “We are fiduciaries … but we may also receive additional compensation via 12(b)-1 fees in addition to the investment advisory fees you, our client, pay. No, we do not credit such fees against your investment advisory fee.” See: 7 reasons why wirehouses shouldn’t milk the old business model.

And they also in essence often say: “We are fiduciaries … but we may also receive payment for shelf space and soft-dollar compensation. And although we are fiduciaries … we have no obligation to ensure that a tax-efficient strategy is utilized in your portfolio. We are fiduciaries … but we won’t even prepare an investment policy statement for you, nor will we design and implement a prudent investment strategy for you, nor even let you know when we are giving imprudent advice.”

And these “fiduciary” dual registrants also often, in essence, state: “Oh, yes. We can also wear two hats. And we can switch our hats at will, in the corner of our dimly lit offices, while you — the client — are unaware.”

There was a time when the SEC was respected. No more.

Government by the people, for the lobbyists

This is what happens when we leave the fiduciary standard in the hands of government. Under ongoing pressure from Wall Street’s banks and the insurance companies, it is abrogated, compromised and gutted. And then, what little that remains of fiduciary obligations is not enforced through diligent oversight.

The fiduciary battles continue in Washington, D.C., and will for some time. Pro-fiduciary advocates may, largely through the courage of Phyllis Borzi and her team at the Labor Department’s Employee Benefit Security Administration, prevail to apply fiduciary standards to all providers of advice to defined-contribution and individual retirement accounts. See: Borzi: Exemptions from conflict of interest will be part of new fiduciary proposal.

Yet, I possess little hope that the SEC will act in similar fashion, either to correctly research what the fiduciary standard is all about, nor whether they will they understand the reasons for its application to investment advisory and financial planning activities. The response of SEC staffers to each recitation of the long-understood requirements of the bona fide fiduciary standard will most certainly be: “Surely the fiduciary standard cannot mean that.”

The SEC takes no action now against the wholesale abrogation by Wall Street’s firms of their fiduciary obligations when providing personalized investment advice. Such nullification of core fiduciary duties occurs by these firms’ mere disclosure of multiple and often insidious conflicts (followed by uninformed consent of the client, not understood, and without intelligent, informed consent). Of course, no client would ever consent to be harmed — the fiduciary standard requires ongoing substantive fairness to the client, even when a conflict of interest is permitted to continue to exist. See: One-Man Think Tank: Inside the legal issues of the Goldman Sachs hearings.

There are major economic forces that have, and continue to, diminish the fiduciary standard of conduct. It has already been diminished. The true, bona fide fiduciary standard, well understood and based upon centuries of legal precedent, will continue to be eviscerated.

'Objectivity’ with a subjective slant

The word “objective” has lost its meaning. Many of these broker-dealer firms tout their objectivity, when no such real objectivity exists due to multiple and nefarious conflicts of interest. Is this fraud?

When the Securities Industry and Financial Markets Association stands up and says all of its members place the customer’s “best interests” above their own, is this fraud? Every other country that has adopted the common law of England as the basis for its jurisprudence understands that the term “acting in your best interests” is tantamount to the fiduciary duty of loyalty. When in the United States did we permit “best interests” to mean otherwise? When did we permit clients to be deceived so often, and to such detriment? See: After starring in New Yorker article, Mary Jo White holds SIFMA event spellbound and 'no-admit, no-deny’ is still in play.

When those who use titles that denote relationships of trust and confidence, and who provide advice under the aura of such representations, yet disavow or disclaim their core fiduciary obligations, is such not blatant fraud?

I am not optimistic about the future of the fiduciary standard. The fiduciary standard, as the SEC presently applies it, is no longer a high standard of conduct. It has become the basis for a new type of fraud. “Trust me” and “fiduciary we” and “best interests” are the expressions of this fraud, when in fact such trust is betrayed by the users of these terms over and over.

True professionals exist, but they are few and Wall Street’s influence is great

What can right this ship? What can undo these wrongs?

Only true professionals can defend the fiduciary standard — by organizing and forming professional societies dedicated to their members’ avoiding conflicts of interest rather than embracing them. That is, embracing all of the core fiduciary obligations, with no need to disclaim these duties away. See: FINRA’s scandalous litany of failures and its efforts to redefine the true fiduciary standard out of existence.

Yet, in my travels, I have seen only a few voluntary professional societies that have actually adopted such high ideals. And less than 1% of those who are involved in financial services are members of these societies. Outgunned and outmatched by millions and millions of dollars from lobbyist contributions and often-secretive dealings resulting in a revolving door between Wall Street, their lobbying firms and the SEC, these professional societies have no real chance to defend the fiduciary standard. Nor do professionals possess any hope that the fiduciary standard will be restored by the SEC to the pre-eminent standard of conduct it once was.

'Let it be known’: The marketplace solution

So what can we do? We must persevere — not in the halls of Washington, D.C., but rather in the realm of public opinion and consumer demand.

Let it be known, loudly and clearly, that financial services regulation is largely a sham. It provides the illusion of protection for those who receive investment and financial advice, when in reality such protections rarely exist. Rather than be the bulwark for the preservation and application of the bona fide fiduciary standard, the SEC has become complicit in its demise. See: An X-ray of one affluent, educated and sophisticated investor’s portfolio shows how it was chewed up by fees.

Let it be known that fraud is rampant and widespread.

Let it be known, loudly and clearly, that there are a trusted few who will act in the clients’ best interest, with no need to disclaim away their core fiduciary obligations.

Let it be known, loudly and clearly, that without a trusted advisor bound by bona fide fiduciary duties at all times, consumers in this complicated financial world — whether they be Mom and Pop and Aunt Bea from Main Street, the fiduciary plan sponsor or the fiduciary endowment or pension fund trustee — have little chance to be successful in attaining their financial goals.

Let it be known, by consumers and the media, loudly and clearly:





The bona fide fiduciary’s oath

Hence, let it be known that only those few advisors who are willing to sign the following oath (designed in some detail, to avoid ambiguous interpretations and to prohibit the most severe conflicts of interest) actually deserve the trust of our fellow Americans:


“I will always put your best interests first. I will not seek to remove my 'fiduciary hat.’ I will always be your trusted advisor during our trusted-advisor-client relationship. See: FINRA’s scandalous litany of failures and its efforts to redefine the true fiduciary standard out of existence.

“I will act with prudence; that is, with the skill, care, diligence,and good judgment of a professional. I will recommend to you only prudent investment strategies backed by solid evidence (through extensive back-testing or through academic research which has withstood the test of time); if an investment strategy is recommended to you that cannot be shown to be prudent, I will ensure that you are fully aware of the risks of such strategy. I will conduct extensive due diligence on both the investment strategies and investment products which I recommend to you. I will ensure that the total fees and costs you pay for the receipt of investment and financial advice and in relation to the implementation of any strategies will be fully disclosed (or at least estimated, when not quantitatively known). I will ensure that the total fees and costs you pay are reasonable.”

“I will not mislead you, and I will provide conspicuous, full and fair disclosure of all material facts. I will explain these facts to you. I assume the obligation to ensure your understanding of these important facts.

“I will avoid conflicts of interest. I will not suggest that I engage in a “principal trade” with you. I will never sell you a proprietary product of my firm, nor a product from any affiliated firm, nor a product from any firm in which I hold a material interest. I will never accept 12(b)-1 fees unless they are fully and completed credited by both me and my firm against the investment advisory fees that you pay to me. Neither I nor my firm will ever receive payment for shelf space or soft-dollar compensation or other forms of revenue-sharing payments. I will avoid all other forms of material third-party compensation to the extent that I can reasonably do so.

“I will fully disclose and fairly manage, in your favor, any unavoidable conflicts. I will ensure your complete understanding of these few and rare conflicts of interest, when they occur. I will seek out and obtain your intelligent, independent and informed consent to such unavoidable conflict of interest. Even then, I will recommend the best course of action for you, in adherence to my continuing obligation to act in your best interests and to ensure substantive fairness exists at all times.

“For my trusted advice and expertise as your financial guide and educator, I require only reasonable professional fees, fully disclosed and agreed-to in advance of any specific product recommendations.


'No one left to fleece’

There will be a time when the bona fide fiduciary standard will become commonplace in the service of individual consumers.

But this will not occur through government action (and inaction). Not through lobbying in the halls of Congress, nor in the conference rooms of government agencies. See: How 10 top groups define 'fiduciary’.

Rather, bona fide fiduciaries will apply it, as they prevail in the marketplace in the years to come.

Only then might the wolves of Wall Street emerge to “see the light” and be willing to adopt bona fide fiduciary obligations to their customers. Only when it becomes apparent, as their market share continues its slow erosion, that they have no other choice but to wear the white hat of the fiduciary. Ultimately they will have no one left to fleece. But that’s a long, long, long time off — years and years, if not decades.

Consumers: Protect thyself

In the meantime, consumers will need to be diligent. They will need to demand the fiduciary oath above. They will need to seek out those very few advisors — who perhaps number only a few thousand in the United States today — who will freely and voluntarily sign the oath set forth above.

Where might consumers find such bona fide fiduciaries — advisors you can truly trust? I would suggest that the members of three professional organizations would likely sign the fiduciary oath set forth above:

National Association of Personal Financial Advisors (www.napfa.org)

Each of these organizations possess, on their websites, “Find an Advisor” search tools for consumers to utilize to find trusted financial and investment advisors.

In conclusion

There was a time when the words “fiduciary” and “best interests” and “trust” and “integrity” meant something truly special in America. With the grit and perseverance of bona fide fiduciary advisors, their clients and the media, there will come another such time.

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.

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.

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.


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..


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