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What the 8 pillars of a FINRA-replacing entity for RIA oversight look like and how personal accountability is key

First and foremost, the PRO would have as it members individuals (not firms) who are qualified to become members of the profession

Sunday, July 28, 2013 – 4:11 PM by Guest Columnist Ron Rhoades
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Ron Rhoades: Only we, as professionals, if armed with a history of its practical application, will be able to call upon Congress to implement a true fiduciary standard and the formation of a professional regulatory organization.

Dina’s note: In this final installment of this four-part series, Ron Rhoades outlines a vision for a true profession of investment and financial advisors, through the creation of a professional regulatory organization that will protect the investor, not Wall Street interests. For those of you new to this series and those who want a recap, check out “Part 1:The story of FINRA’s implacable drift from its founding ideals to a pallid 'no-lying baseline’, “Part 2:Why keeping FINRA from ruling RIAs is critical to these firms, the investor — and even the U.S. economy and “Part 3:FINRA’s scandalous litany of failures and its efforts to redefine the true fiduciary standard out of existence of Ron’s Fiduciary quartet. The last refuge of the criticized is to say: Well, then what would you do? With this article, Ron has preemptively struck down that line of counterattack.

The next financial crisis will come.

The reforms instituted, and that remain to be instituted, during the legislative and regulatory processes following the 2008-'09 financial crisis have been severely watered down. As a result, Congress and regulatory agencies have laid the foundation for yet another resurgence of excessive greed, with its ultimate dire consequences for the capital markets and our economy. See: The 10 most likely contributors to the next market panic.

The U.S. Congress rarely acts until a crisis has occurred. So, sitting here in mid-2013, we must ask whether we can outline the reforms that can voluntarily be adopted, in preparation for such an event. Why? So we can, as a profession, be prepared when the next crisis triggers congressional action.

A world too complex for FINRA rules

Given the complexity and global nature of the modern financial market, attempts to regulate the provision of personalized investment advice by specific rules as utilized by FINRA under its current regulatory regime will fail. Such an approach will inevitably encounter the fundamental problem of regulatory arbitrage. Such specific rules should just permit “financial institutions [to] find new ways to get around government rules, thus creating a never-ending spiral of rule making and rule evading,” according to Saule T. Omarova, in her 2011 law review article “Wall Street as Community of Fate: Toward Financial Industry Self-Regulation.”

Instead, we must embrace principles-based regulation, and in particular, the fiduciary principle. While there have been many judicial elicitations of the fiduciary standard, including Justice Benjamin Cardozo’s lofty elaboration, a relatively recent and concise recitation of the fiduciary principle can be found in a case in which Lord Millet undertook what has been described as a “masterful survey”:

“A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of the fiduciary obligations. They are the defining characteristics of a fiduciary.” See: How 10 top groups define 'fiduciary’.

70 years of low standards

As previously explored in Parts 1 to 3 of this series, FINRA, under the control of its major members — Wall Street’s large broker-dealer firms — has kept the standards of conduct for brokers at extremely low levels for over seven decades. In so doing, it has utterly failed to protect the public interest. In a February 2010 letter to Congress calling for increased oversight of financial self-regulators, the Project for Government Oversight noted:

“[A] cursory examination of FINRA’s current leadership paints a clear picture of a regulator that is still captured by the [broker-dealer] industry it is tasked with regulating … Effective, independent and efficient government regulation is the only proper way to safely oversee our markets. Our economy is too important to be left in the hands of the very financial industry that brought us to the brink of collapse … [FINRA chief executive Richard] Ketchum argued that FINRA has a 'strong track record in our examination and enforcement oversight.’ However, POGO believes that FINRA’s track record tells a very different story. In fact, financial sector self-regulators, despite the power vested in them by the federal government, have failed to prevent virtually all of the major securities scandals since the 1980s.”

Even in 1941, the organization, then the National Association of Securities Dealers, commented upon the necessity of raising the standards of conduct, when its chairman opined: “[T]he time may come when we can arrive at a more professional status and we can give more of our attention as to who should be in the investment business …The principal byproduct [of formation of the SRO], which I don’t believe the founding fathers of this association ever thought of, is that for the first time in history the securities dealer begins to see what he looks like and it hasn’t been altogether a pleasing sight.”

Of course, as discussed in earlier installments of this series, FINRA has failed miserably to attain “professional status” for the “securities profession,” primarily because it has never raised its standards of conduct for its members and has never put the interests of the consumer first. See: Why advisors see FINRA as the devil.

The Maloney Act is a failed experiment (See: The story of FINRA’s implacable drift from its founding ideals to a pallid 'no-lying baseline’). Congress should disband FINRA and return broker-dealers to direct oversight by the Securities and Exchange Commission. Certainly, FINRA’s failures should not be rewarded.

A new organization borrowing from an old, trusted template

To replace FINRA, with regard to the market conduct regulation of those brokers and advisors providing financial planning and/or personalized investment advice, I propose the formation of a professional regulatory organization similar to the organizations that exist today for lawyers and certified public accountants.

How would a PRO be different from FINRA? Through these eight key attributes:

1. First and foremost, the PRO would have as it members individuals (not firms) who are qualified to become members of the profession.

History has shown that individuals, when guiding professional organizations (assisted by consumer representatives), seek to preserve and enhance professional standards of conduct. In contrast, firms as members of an SRO seek to consistently lower standards of conduct. This is, perhaps, the primary reason for FINRA/NASD’s abject failure to raise standards over the past seven decades. See: Non-partisan watchdog group writes a scathing letter about FINRA.

2. The PRO would possess a clear and unambiguous adherence to a bona fide fiduciary standard for its members.

The principles of the fiduciary standard would be clearly stated. As part of same, it would be recognized that, under the fiduciary duty of loyalty, disclosure of the conflict of interest is only a minor part of the fiduciary’s obligation. Such disclosure must be affirmatively and comprehensively made in a manner in which the financial advisor ensures client understanding of the conflict of interest and its possible ramifications. Thereafter, the client’s informed consent (not mere consent) must be secured. Even then the transaction must remain substantively fair to the client. In other words, it would be recognized that no client would voluntarily provide consent to be harmed; clients are not that gratuitous toward their financial advisors. See: Why only 14% of RIAs volunteer complete pricing information to clients and why selective fee disclosure is not a winning strategy.

Additionally, removal of the fiduciary “hat,” while not impossible, would be restricted to those situations in which is was likely that no further personalized investment advice would be provided to the client. Moreover, the fiduciary obligations would extend to the entire relationship with the client; the fallacy that a dual registrant can wear two hats at once will be forever buried.

3. The PRO would possess as its primary purpose the protection of the public interest.

4. A four-year college degree from an accredited institution would be required, plus an advanced course of study in financial planning and investments.

5. Peer review of alleged violations would be initiated.

One of the problems of securities regulation today is its focus on disclosure; in part, this is because securities examiners can test adherence to disclosure obligations fairly easily. Yet, evaluation of adherence to the full extent of the fiduciary’s duty of loyalty, and adherence to the fiduciary’s duty of due care, will usually require the judgment of professionals with substantial experience in the field. Hence, mandatory peer review of disciplinary matters should occur. See: Lockshin: All advisors must deal with the threat of low industry standards — before investors do it for them.

6. All fines imposed would be paid to U.S. Treasury and/or to the states, as appropriate.

This to avoid the inevitable conflict of interest arising from using fines imposed upon members to pay any expenses of the professional organization. Only the costs actually incurred by the professional organization in undertaking an investigation and any enforcement action could be recovered against a firm found to have committed a breach of duty. See: FINRA comes up with cost projections for its SRO and the CFP Board blasts them.

7. Either mandatory pro bono hours each year, or a mandatory annual contribution to a not-for-profit providing such services, would be required of all members.

Because, in the end, the profession must serve the public, including those who may be unable to afford (even on an hourly basis) the services of professional advisors.

8. Through legislative fiat (at the national and/or state levels), only professionals duly licensed as financial and investment advisors would be permitted to hold themselves out as such.

This includes a prohibition on the use of similar titles, or designations, by non-licensed individuals. Only those persons duly qualified would be permitted to practice and be allowed to utilize titles denoting professional status.

The Journal of Financial Planning initially published Dick Wagner’s seminal article, “To Think…Like a CFP” more than 30 years ago, in 1980. Wagner called for financial planning to become a true profession. He observed: “A true profession and its standards are important enough that its principles generally will prevail — often at the expense of apparent self-interest. Certain types of employment will be refused, certain procedures will be unacceptable under any circumstances. Financial sacrifices will be made in the course of these decisions. However, the ultimate financial impact will be positive because consumers will know what to expect and will have made the informed decision to pay for it!”

In other words, should consumers finally be able to trust all financial and investment advisors, as would exist if a true profession existed founded upon the fiduciary principle, demand for financial and investment advice in today’s complex financial world would soar. Additionally, the profession would attract more and better new entrants, to assist in serving the burgeoning demand for advice.

Can’t FINRA change?

This is doubtful, even if legislative action and SEC rule making occurs which enables FINRA to achieve all of the foregoing attributes of a true professional regulatory organization.

At its core, FINRA does not understand a true fiduciary standard of conduct, nor does it embrace a true fiduciary standard. It would take years, if not decades, to effect the culture change within FINRA necessary to effectuate the adoption, promulgation and enforcement of a true fiduciary standard of conduct.

Many a time I have seen a non-fiduciary broker hired by a registered investment adviser (not dual registrant) firm. And many a time I have seen the non-fiduciary broker unable to adjust, even after a year or more, to the strict ethical code to which true fiduciary advisors adhere. FINRA would encounter even more difficulties in this regard.

Of course, the SEC could compel FINRA to adopt rules of conduct that embrace all of the attributes of a true fiduciary standard of conduct. If FINRA refused to do so, the SEC could proceed administratively against FINRA as a substandard SRO, applying Securities Exchange Act § 19(9)-(h). Yet, realistically, given the close relationship between the SEC and FINRA, and the movement of personnel back and forth between the SEC, FINRA, the law firms serving Wall Street and the and large Wall Street firms themselves, this does not appear to be an option. It would take tremendous courage for three members of the SEC to force through such changes, as well as a Congress that understood the importance of the fiduciary standard of conduct for all Americans.
Hence, the far better approach is to “start over” and form a true professional regulatory organization.

Can a PRO be formed now?

Not right away. It would likely require action by Congress (although enactment one state at a time is an alternative). And, as we know, Congress does not usually act until a major financial crisis comes along.

But we can’t wait until the next financial crisis to begin the process of forming a professional regulatory organization. It must begin soon, if not now.

What can we do to prepare?

We must, as professionals, define and embrace bona fide fiduciary standards of conduct.

Currently, financial and investment advisors have several voluntary organizations. Some of them award certifications and designations; some do not. Many of them have ethical codes of conduct, but I would argue that most of these ethical codes fail to set forth the parameters of fiduciary obligations correctly, or in sufficient detail. See: Little-known understudy steps into NAPFA star role as Ron Rhoades bows out.

If we are to achieve a true profession, at the time of the next financial crisis, we must prepare, and voluntarily unite around, robust rules of professional conduct in which a true fiduciary standard is embraced by all of the members of such an organization and enforced through appropriate peer review. Then, armed with experience over the years in applying such a standard, the organization and its professionals would be well-equipped to petition and inform Congress of the merits of a true PRO at the time of the next major financial crisis.

What about the Dodd-Frank Act?

It is possible that a bona fide fiduciary standard can be imposed by the SEC on all those who provide personalized investment advice under Section 913 of the Dodd-Frank Act. I (and many others) will continue to advocate for this, through comment letters, other writings and visits to the SEC. I will also continue my advocacy in support of the Labor Department’s reproposal of its “Definition of Fiduciary” — in which the strict “sole interests” standard would be applied to nearly all providers of investment advice to defined-contribution plans and individual retirement accounts. See: Barney Frank puzzles crowd on his fiduciary stance at TD summit — as questions from Skip Schweiss and advisors expose his haziness on the RIA structure and soul.

Yet, as seen in the SEC’s March 2013 request for Information, major economic interests (Wall Street firms and insurance companies) have influenced the SEC to “assume” various parameters for a “fiduciary standard” that is not really a fiduciary standard at all — at least in the context of the world of professional advisors.

Rather, the SEC’s RFI posits a standard that is more akin to the very weak fiduciary standard seen in the world of employer-employee relationships, applying only basic principles of agency law. The SEC’s RFI ignores the stricter fiduciary-law requirements found in professional advisor-client relationships and reflects an inadequate understanding of the substantial public-policy rationale leading to the imposition of fiduciary status upon the professional advisor. See: Top RIA lawyer explains to the SEC why 'harmony’ is a harsh misnomer and why the price of its false spin is paid by investors.

The chance exists to turn the tide of rule making at the SEC, and hence we should work diligently for the SEC’s enactment of an appropriate and bona fide fiduciary standard. However, we must be prepared for the more likely outcome that the SEC will fail to act appropriately.

Take the next step

Hence, in the event (as appears likely at present) that the “fiduciary standard” is either not imposed upon brokers providing personalized investment advice by the SEC, or some weaker standard is imposed, as professionals we must be prepared to take the next step. See: TD throws its first client-best-interest summit, a micro-event, by 'candlelight’ in Palm Beach and ideas rise from the RIA deeps.

We must be prepared to embrace, voluntarily, through an existing organization (which possesses the courage to step up to the table) or a new organization, bona fide fiduciary obligations similar to those seen for other professional advisors (such as attorneys). We must be prepared to hold that, while reasonable restrictions can be imposed upon the scope of an engagement, that such professional, core fiduciary obligations cannot be waived.

We must be prepared to approach Congress when the next financial crisis occurs. Only we, as professionals, if armed with a history of its practical application, will be able to call upon Congress to implement a true fiduciary standard and the formation of a professional regulatory organization. It may take years, if not decades, for the opportunity to arise … but it will. See: Bernie Clark and Skip Schweiss head to Washington next week to fight on behalf of RIAs in Bachus bill showdown.

Hopefully the opportunity to spur Congress to act will occur soon (although I don’t wish for another financial crisis and its dreadful effects on our society), in order that our fellow citizens no longer suffer the harm they currently endure, far too often, at the hands of those not currently bound by a fiduciary standard.

Hopefully the opportunity will appear soon, in order that trust can be restored to our system of capital markets, greater capital formation occur, and we enter into a new era of American economic prosperity as a result.

Hopefully a true fiduciary standard and a professional regulatory organization will come to fruition soon, for the benefit of all providers of investment and financial advice, in order that we may then walk the streets proudly as the members of true profession.
Hopefully this vision will achieve reality, and soon. For the benefit of all consumers of financial and investment advice. For the sake of the financial futures of our fellow Americans. For the economic stability and vitality of America itself.

Ron Rhoades, JD, CFP® serves as chairman of the Steering Committee of The Committee for the Fiduciary Standard. He is an assistant professor of business law and financial planning at Alfred (N.Y.) State College.

Stephen Winks

Stephen Winks

July 31, 2013 — 7:10 PM


There is an overwhelming case for simplicuity and modernity, in everyone’s best interest.

The solution may indeed be free enterprise innovation which renders brokerage and regulatory self interest irrelevent, if the best interest of the consumer continue to be dismissed.

Professional standing, serving the client’s best interest, the streamlining of cost and better advisor compensation will win the day.


Fiduciary Advisor Advocate

Fiduciary Advisor Advocate

July 30, 2013 — 12:33 PM

I would not disagree with pretty much everything you mentioned. A couple of thoughts- I did not mean to suggest that disclosure of compensation is, by itself, sufficient to alleviate the inherent misalignment. Of course a demonstrated process which is clear, documented, based on fundamentally sound investment practice/ theory and repeatable is a necessary requirement. During my tenure in this industry (which is long) that has been the mantra in the institutional 'sponsor’ community, asset management business and increasingly in the alternative space. There really is no reason why many, if not all, of these 'fiduciary standards’ cannot be applied to smaller asset pools except…they would require disclosure and ultimately bump up against the revenue model for BDs.

One man’s opinion is that the reason the BD community hasn’t asked for a means of aligning interests isn’t because they don’t know it is available- I think it is because it would kill the golden goose and be such a shocking culture change. Unfortunately, many brokers who consider leaving the wire house world for independence under the auspicious of client realignment (Fiduciary Advisors) and have institutional/ demonstrated capabilities at their disposal- don’t use them…the predominant question is how do they get paid and they are much more comfortable being compensated via transactions or spread than via an advice fee.

I agree with you- let the consumer decide. But that decision should be based on disclosure and adequate information. I also agree with you that given clarity regarding process, investor will take the fiduciary route. If folks decide to go in a different direction so be it- but let’s not hide the ball on them. Let’s work to help clarify for the investor what they should expect from their 'advisor’ and one way to understand the incentives and motivation of the 'advisor’ is to follow the money trail.

Stephen Winks

Stephen Winks

July 31, 2013 — 10:51 PM




Andrew May

Andrew May

July 30, 2013 — 10:55 PM

This idea is also espoused by people in the futures industry to get rid of the National Futures Association (NFA). The joke told about FINRA is that it is a “member organization” in name only. Broker-dealers (BDs) and registered representatives feel that it does not do much for its members. Like all organizations, after a while, it becomes more concerned with defending its turf. FINRA is making it cost prohibitive to operate a broker-dealer and thus the number of B-Ds is declining and the number of registered investment advisers (RIAs) is soaring. FINRA’s attempt to become the self-regulatory organization for investment advisers scarred a number of people who fled FINRA to death!

Stephen Winks

Stephen Winks

July 29, 2013 — 9:56 PM


Brilliant as usual !

The only thing we can cotrol in this discussion is ourselves. Thus, it is the broker and advisor who shape the industry not the broker/dealer or custodian must be the change agents. If a group of top brokers were to state, it is unacceptable to give up 60% of their gross revenues for inferior competitive market position in advisory services—the major brokerage firms (where brokers average $1 mikllion in gross revenue a year) would immeduiately respond. The same for independent broker dealers that only retain 20% of less of gross revenues. This is called leadership.

Brokers and advisors have the power to foster highly constructive innovation required for professional standing in advisory services in the consumer’s best interest.

Because expert professional standing in support of the consumer’s best interest is important to the consumer, can the broker and advisor remain in a tenable position of working at cross purposes with the best interests of the investing public? If our leading institutions and regulators are failing to enstill the trust and confidence of the investing public,—then it is up to brokers and advisors to be more demanding. This is how a free market works. Brokerage firms and their regulators run the risk of becoming irrelevent, terribly expensive and demonstrably at cross purposes with the investing public.


Fiduciary Advisor Advocate,

Your point that there is a complete misalignment of interests and motivations is absolutely correct but it is not resolved by compensation disclosure. The solution is recognizing that financial services are not homogenius. Leave it to the consumer and enterprising advisors to sort this out. There are actually four levels of counsel that commonly exist today:

1. Transactions: There is commission sales where access is provided to a wide variety of products (which can be obtained for free) where the broker is not accountable for and has no ongoing responsibility for recommendations. This space is dominated by discount brokerage firms in the consumer direct space. Full service brokers which are not accountable or responsible for recommendations charge a premium for product access but by definition can neither add value nor offer overarching counsel as it triggers fiduciary responsibility and liability not supported by their broker/dealer. The notion of professional standing and skill is beyond the internal compliance protocol of broker/dealers under the regulatory auspices of FINRA and the SIFMA as in accord with compliance protocol, brokers literally do not render advice.

2. Financial Planning: Financial Planning is needs based selling establishing a rationale for investing such as educating children or retirement as opposed to consumption. There are no statutes pertaining to educating children or saving for retirement or buying a vacation home or boat. Though there is noble aspiration to act in the consumer’s best interest, because planners are supported in large part by broker/dealers which do not acknowledge or support fiduciary standing, the expertise and individual intiative required by under resourced independent brokers is daunting to act in a fiduciary capacity based on objective non-negotiable fiduciary criteria of statute, case law and regulatior opinion letters. In tha absence of large scale institutionalized support for fiduciary standing afforded by custodians or iB/Ds, the planner is on their own, alone, as a practitioner where no operating scale is not possible and technical resources are limited.

3. Investment Management Consulting:.Large brokerage firms treat advice as a product brokers sell where there is little or no control over the broker’s value proposition, cost structure, margins or professional standing as required for individualized advice (beyond persobnalized) necessary for fiduciary duty and professional standing.

4. Fiduciary Counsel: Fiduciary counsel treats advice as an expert authenticated prudent investment process managed by advisors based on expert non-negotiable fiduciary criteria of statute, case law, regulatory opinion letters. Skill is determined by best practices in executing (i) an asset/liability study, (ii) investment policy statement, (iii) portfolio construction, monitoring and management. This entails: (i) advanced technology which supports continuous comprehensive counsel, transparency and modern approaches to portfolio construction required for fiduciary standing, (ii) expert authenticated prudent investment process as cited above which makes advice safe to acknowledge and to confirm professional standing, (iii) work flow management tied to a functional division of labor (advisor, CAO, CIO) so advice is scalable, easy to execute and manage as a high margin business at the advisor level at a lower cost than a packaged product.(where by definition individualized advice is not possible), (iii) conflict of interest management, not presently possible in a brokerage format.

Of these four levels of counsel, the entire industry will gravitate toward fiduciary counsel in the consumer’s best interest. Given the development of large scale institutionalized support for fiduciary standing the aspirational goal of planner could actually be fulfilled, but such a support mechanism does not presently exist today—unless denmanded by brokers and advisors alike in a scalable, easy to use and manage, authenyicated expert format..

FINRA and the SIFMA have little to do with the development of these enabling resources as they continue to lobby for a lesser consumer protection for retail investors than that afforded to all other investors. Yet if advisors and brokers who wish to align with the best interests of the investing public were to demand world class advisory services support in the consumer’s best interest, it would be created in six months and demonstrably proven so at a lower cost than a packaged product. Brokers and advisors just haven’t asked, perhaps because they do not know what is possible.

There is a choice of loyalty to the consumer or loyalty to the broker/dealer. If given that choice, the consumer will choose fiduciary standing in their besty interest every time. Anyone that does not think so is deceiving themselves. Thus the opportunity is to protect the trust and confidence of the investing public and aligning with the best interests of the consumer. The best interest of the brtoker/dealer is irrelevent. The extraordinary regulatory powers granted by Congress to former brokerage industry industry trade associations (National Association of Securities Dealers) FINRA and (the Securities Industry Association) SIFMA became immediately subordinated to the best interest of the investing public when those powers were granted.. The problem is these regulatory biodies are still acting as brokerage industry trade associations rather than being principally focused on thest interst of the investing public. How can “retail investors” be accorded lesser consumer protections than all other investors? Pretty obvious.


Ron Rhoades

Ron Rhoades

July 31, 2013 — 8:10 PM

Thank you for the discussion and comments.

In reply to PPott, let me state:

(1) I have met with hundreds of individual investors over the years. When I explain to them what their non-fiduciary “financial advisor” is really getting paid (which is nearly always unknown to the consumer), and all of the fees and costs being paid, and the tax inefficiency of their portfolio design (or select products used therein), they are always quite angry at their (now former) advisor. An upcoming article, to be published at RIABiz shortly, will provide a recent, concrete example. Moreover, there is substantial academic evidence which ties consumer trust to capital markets participation, and fiduciary standards to consumer trust. The series of articles did not include the numerous citations contained in the white paper upon which the articles were based; I will post the white paper, in full, to my blog, within the next few weeks. Follow me on Twitter (@140ltd) or connect with me on LinkedIn to be notified of such posting. (2) Although the ERISA statute posits a fiduciary standard, under a rule adopted in 1976 by the DOL most “advisors” to defined contribution plans are NOT operating as fiduciaries. Of course, this may change soon – with the re-proposal and adoption of the DOL’s “Definition of Fiduciary” rule (if and when finalized). (3) It is possible to provide more specific principles under the fiduciary standard. This will be the subject of a future article. With such guidance, both consumers as well as advisors will know what is expected of one practicing under the fiduciary standard of conduct. Also, the fiduciary standard is no more vague than the inherently low standard of “suitability.”

The public expects, and deserves, advisors they can TRUST to act in their best interests, and as expert advisors. It’s that simple.

There will be those who don’t understand the fiduciary standard (and its many benefits to both consumers and to professional advisors), who resist change, and whose personal economic interests are adversely impacted by the application of the fiduciary standard. There will be firms whose entire business models will not fit the fiduciary standard of conduct. But these are not valid reasons to not embrace a fiduciary standard for all providers of personalized investment advice.

Do you desire to be a product seller? Fine. Quit calling yourself an “advisor” or using any other title or designation which leads the consumer to believe you are acting in a relationship of trust and confidence. Put the consumer on notice of the merchandizing status. Stop providing personalized investment advice, and confine yourself to describing the product you are selling. These are the requirements expressed early on by the SEC, and which are reflected in judicial decisions applying the state common law fiduciary standard to brokers found to be in relationships of trust and confidence with their clients. Moreover, as some fellow academics opined recently in a law review article, and I paraphrase – to engage as a product seller, while creating an aura that you are a trusted advisor – is fraud, plain and simple.

But – if you desire to provide personalized investment advice, then embrace the fiduciary standard of conduct. Realize that consumers possess a reasonable expectation that you will act in their best interests. Seek to minimize conflicts of interest which may arise between you and the client. Understand that being a fiduciary does not involve selling a particular product; rather, it is seeking out the very best strategies and products to fit the needs of your client. Understand that, unlike a rules-based system (with a plethora of rules to navigate), the fiduciary principle is easy to follow – you simply have to do the right thing by the client each day. In this situation, going to work each day is something you look forward to. Being a fiduciary – and living it each and every day – is very low-stress. And it leads to much closer relationships with clients – another added bonus.

Moreover, if you embrace fiduciary status, don’t seek to wear “two hats” at once (as many jurist has opined – an impossible situation). Never seek to remove the fiduciary hat (because once a relationship of trust is formed, the client’s trust will continue on and on, regardless of any disclaimer or waiver). And, instead of learning how to “sell,” concentrate your education on becoming the expert advisor. Become a “financial educator” to your client. Be their trusted advisor in all things financial. Enable your clients to achieve their goals. Do all of these things, and it is a great life to lead. It is one of the most rewarding careers anyone can have. And, I would be honored to call you a “professional colleague.”

Lastly, I am not known to be brief in my writings. And presenting history often involves conveying excerpts from many past events. But I hope readers regard what I have to say as substantive and helpful as we seek to move toward a true profession.

Thank you.

Stephen Winks

Stephen Winks

July 30, 2013 — 1:34 PM

Fiduciary Advisor Advocate,

The wonderful thing about innovation and modernity is that it makes many seemingly complex problems so easy to resolve.

If the broker could provide an unprecedented level of counsel at less cost to the consumer and increase compensation 50%—all of which is readily achievable—suddenly the brokerage industry’s inability to adapt is no big deal, its their market share to loose.

History tells us there has never been an instant in a free market where the consumer’s best interest did not prevail.The goose that laid the golden egg is the goose that is aligned with the best interest of the investing public. The old goose is ready for retirement.

As the average age of the broker approaches 55, the next generatron of brokers will be advisors. 70% of industry revenues are expected to be fees by 2015. How long will the next generation of advisors put up with any excuse for an inferior approach to advisory services that is terribly expensive and precludes professional standing? Why are brokers paying 60% plus of their revenues for an inferior competitive market position? How long will the FINRA and the SIFMA as regulators continue act as trade associations protecting the industry’s best interests rather protecting public trust, the consumer’s best interest, fiduciary duty and the professional standing of the broker? The obvious conflicts are trying the patients of professional advisors, consumers and even Congress despite 2000 industry lobbiest and a former highly regarded Senator Judd Gregg trying to influence Congress. Fiduciary duty is literally the right thing to do and the industry has a loosing hand if not by political influence, then by the workings of the free market that outdates the brokerage model of 70 years ago.

The invisible hand of the free market as envisioned by by Adam Smith (coincidently in 1776) in the age of enlightenment is remarkably elegant. It has never failed. Todays modernity mantra of faster, better, cheaper is alive and well. The brokerage industry and its regulators haven’t figured it out yet and are literally stuck in another time. The only complexity is trying to hang onto an expensive outdated business model inconsistent with professional standing and the consumer’s best interest.




July 31, 2013 — 6:51 PM

A very interesting series of articles from someone who seems at odds with brevity. The idea of a PPO has been floated often but the industry is too fragmented and lacks regulatory oversight.

The author loves to say that the fiduciary standard will rescue consumer confidence and yet there is little concrete proof to back that claim up. In fact, ERISA plans, which by definition entail fiduciary oversight are coming under attack for being to expensive to the detriment of the participants. The fiduciary standard doesn’t provide protection.

The public also deserves rules – concrete rules under which they can invest, and not a mumbo jumbo which requires a panel of experts to discern the violation.

Fiduciary Advisor Advocate

Fiduciary Advisor Advocate

July 29, 2013 — 7:21 PM

This is very good…very ambitious but very good. Here’s where I get confused- it seems to me that a lot of brokers like to call themselves advisors when in fact they are brokers. If I am not mistaken a broker is compensated via the placement of product- they receive some form of compensation…commission, trailer or whatever. An advisor, on the other hand, in my experience is compensated for their advice and not via a commission from resulting product placement. In the case of the real advisor- I can understand how a fiduciary standard can work…develop a definable, repeatable process, disclosure all levels of compensation etc. I don’t understand how a fiduciary standard can work however for the broker whose compensation is tied to the placement of products. There is a complete misalignment of interests and motivation isn’t there?

So, one idea would be complete disclosure regarding how and how much everyone in the food chain is paid. If I were building a house and hired a contractor (let’s call that contractor the advisor) I would want to know how that contractor is paid. Am I paying him for his advice or is he being paid a spread between building costs and what he charges me? I would want the former because that contractor is working for me and I have a better chance of getting the best plumbers or electricians. The worst would be if they got paid both ways-

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