fiduciary or not? a "Bait and Switch" game

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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sat Dec 22, 2012 10:41 am

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Fiduciary Duty

There is a growing disconnect between consumers and financial service representatives. The complexities of compensation methods for financial products and the blurring grey areas between sales and advice make it increasingly difficult for consumers to know whether or not their financial service representatives are truly acting in their best interests. Media coverage of financial scandals and misconduct by financial service representatives in Canada and the neighbouring United States has created mistrust between the public and the financial service industry.

As a result, there have been increased calls in Canada and internationally to hold financial service representatives to a higher standard: a fiduciary standard of care.
There are five generally accepted principles behind a fiduciary relationship. These are:

1. Put the client’s best interest first;
2. Act with the skill,care,diligence and good judgement of a professional;
3. Provide full and fair disclosure of all important facts;
4. Avoid conflicts of interest; and
5. Fully disclose and fairly manage—always in the client’s favour—unavoidable
conflicts.


There is a legal argument that suggests that a fiduciary relationship cannot be imposed by statue: it either exists or it doesn’t, based on the terms of the relationship. In a true fiduciary relationship, a client is able to vest the utmost trust in their fiduciary. The client would be completely relieved of the need to engage with the fiduciary. Such a relationship does not however reflect the nature of the relationships between most clients and their financial service representatives.

Today, consumers are taking a more active role in their own financial situation. Many clients research products and direct investments, suggesting that the very nature of the relationship may not truly be a fiduciary one. In fact, a financially literate consumer should take an interest in, and participate in, financial decisions that may affect their financial futures. Yet, it is undeniable that financial service representatives need to put the interests of the client above their own.

The common principles of a fiduciary relationship are important for financial service professionals to recognize and strive for, but imposing and using a fiduciary standard of care on all financial service professionals is not a realistic solution due to the practical implications of enforcing it, and the legal arguments which would suggest that in fact the nature of the relationship is not that of a “true” fiduciary.
Admittedly, there needs to be a better solution than the existing model. Currently a “Know Your Client” form is the standard for determining suitability of investments and............

Full document available at this link: http://www.osc.gov.on.ca/documents/en/I ... p-fpsc.pdf

and here : https://docs.google.com/open?id=0BzE_LM ... W5rR2VYTHM

(I give the FPSC full credit for this document, and the client-first thinking behind it. It is the first I have seen of such from them and it is encouraging, Advocate for best industry practices)
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Wed Nov 28, 2012 10:12 am

Quality of financial advice Australian study :2003 Australia Securities & Investments Commission The following deficiencies were regularly found in plans assessed as part of the study:
• failing to provide an Advisory Services Guide (14% of planners),
• failing to show how the recommended strategy and action was appropriate for the client,
• plans were hard to read and ‘padded’ with reams of generic information,
• planners ignored key client requirements and didn’t explain why,
• higher-fee investments (including wrap accounts and master trusts) were recommended without showing why these were better,
• planners recommended selling existing investments without showing how new investments or investment vehicles would be better.
The 54 page report noted: “ It is worrying that 14% of the plans from CFPs and 12% of plans from CPAs were in the “Poor” or “Very Poor” categories. “ and “The overall quality was significantly worse if the planner was only paid by commission- 44% of the “commission only” plans were graded “Poor” or “Very Poor” .
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Advice_Report.pdf/%20$file/Advice_Report.pdf
This study may be written in 2003 but it is what we see here in Canada in 2012.Since 2003, the ASIC has moved to a fiduciary level for advisers.

Thanks to Ken at www.canadianfundwatch.com for this post
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Thu Nov 01, 2012 8:33 am

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The financial industry's long path to putting the client first
JANET MCFARLAND
The Globe and Mail
Published Wednesday, Oct. 31 2012
Opposition to a proposal to create a tougher standard of care in the financial industry is leaving one of the staunchest supporters of new regulation dismayed that a long-fought battle could drag out for more years to come.

After years of study, Canada’s securities commissions issued a consultation paper last week asking for comments on the idea of stiffening the legal duties owed by financial advisers to their customers when recommending investments.

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While advisers are now required to recommend “suitable” investments to their clients, a proposed “fiduciary duty” rule would make it mandatory to act in the best interests of clients at all times.

The higher duty of care could have profound implications. A fiduciary duty – similar to standards imposed on doctors and lawyers – requires always recommending the best choice for the client without regard to which product may pay more fees or incentives to the adviser.

The consultation paper from regulators takes no position on the issue, but asks for comment on key issues about whether a fiduciary duty would change anything significant about how advisers work. There is no promise that regulatory change will result from the consultation. If regulators opt to proceed, they would need to draft and publish specific proposed reforms for further comment.

The neutrality of the paper, the slow pace of movement on the issue and the strong industry opposition that has emerged to the proposal have all dismayed lawyer Ed Waitzer, a former chairman of the Ontario Securities Commission who has been championing reform.

The “fiduciary duty” idea has been around for 20 years, he says, and with the headwinds of opposition it is facing, it may languish for years to come. “This could easily become one of their intergenerational projects,” he warned.

In the meantime, Mr. Waitzer said he worries that Canada’s securities commissions are “ragging the puck,” by writing a complex consultation paper that gives them the appearance of being busy on the file while not actually pushing ahead on reform.

The “worst of all worlds” is to keep waiting for action on an issue that will never proceed, he argues, and the better option could be to move ahead with a different idea, such as simply banning certain types of commissions for investment advisers, as Britain has done.

However, Ontario Securities Commission vice-chairman James Turner said progress is being made.

“This is an important step to have the [regulators] go out with a consultation paper on this proposal. Clearly it’s a matter on our policy agenda,” Mr. Turner said. He argues the consultation is necessary because there has not been a “full canvassing of views” on the issue in Canada.

Securities regulators have had input from the investment industry, however. The Investment Industry Association of Canada, an industry organization for brokerage firms, has met with Canadian Securities Administrators officials and submitted a paper on the issue last year questioning whether reforms would have any practical value, said IIAC policy director Michelle Alexander.

“We are pleased the paper is looking at industry concerns … and they’re really seriously considering whether or not a fiduciary standard should be introduced in Canada,” she said. “We’re pleased that they haven’t decided at this point that a major overhaul is required of the statutory requirements.”

The industry fears new legislative requirements could be heaped on top of newly tightened industry rules governing conflicts of interest and disclosure of fee information to clients. A fiduciary standard could be redundant at a minimum, and carries risks of unintended consequences, Ms. Alexander said.

One risk is that all commission-based transactions could be viewed as inherently conflicted, requiring a substantial shift to new sorts of arrangements whereby advisers charge annual fees for their work rather than earn fees from commissions on trades. And that could be far more expensive for many clients, she warned.

Rick Nathan, managing director of investment firm Kensington Capital Partners Ltd., said he does not believe a fiduciary duty standard would actually change how advisers deal with clients. He said the industry already sees its role as helping clients pick suitable investments.

“I’m not sure it would make much difference,” Mr. Nathan said, when asked about the issue while speaking on a panel at an OSC event on Tuesday. “Because I actually believe most advisers wouldn’t understand the additional legal context … I don’t think it would change their behaviour.”

Mr. Waitzer argued the introduction of a fiduciary standard would have a powerful effect on how investment advisers approach their work and make recommendations to clients, noting that similar reforms have had a big impact on the work of other professionals, including pension fund trustees and corporate directors.

“It tremendously changes” how you approach your work, he said.

http://www.theglobeandmail.com/report-o ... le4804305/
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Oct 29, 2012 12:47 am

‎"The lower suitability standard allows advisors and financial services firms to push proprietary and higher fee/commission products, conduct less due diligence, and offer less comprehensive and less constructive advice. It also affords the client significantly less recourse to address wrongs when they do occur. This to a client who thought they were working with a firm or advisor who had their best interests at heart. After all, that's what was implied in the marketing material..."


Screen Shot 2012-10-29 at 1.42.09 AM.png

Written by Chad Creveling, CFA & Peggy Creveling, CFA
Tuesday, 17 July 2012 18:33

"It said financial advisor on my business card, but that's not what JPMorgan actually let me be," said one former broker. "I had to be a salesman, even if what I was selling wasn't that great."

"It was all about the money, not the client," said another former advisor.

These are quotes from a recent New York Times article and editorial concerning one of the latest scandals to emerge from the financial services industry, where internal emails and comments from former advisors with JPMorgan's investment advisory operations clearly show the culture of the firm placing its interests ahead of those of its clients.

Unfortunately, this type of practice occurs all too often in the aggressive sales-oriented cultures that permeate bank and broker-dealer financial advisory businesses catering to ordinary investors. Despite marketing pitches of "trusted advisor" and dressed-up titles, financial incentives and corporate culture often pressure these "financial advisors" to aggressively sell products and services that maximize their employer's profit, rather than offering objective advice in the best interest of the client.

According to the New York Times, "what investors have to realize is that the nation's securities laws still do not impose a fiduciary duty on brokers who give investment advice, which would require them to act in the best interest of their clients. Brokers have to recommend 'suitable' investments, but that standard gives them leeway to pitch products that boost their firm's profits, exposing investors to misleading pitches and overly expensive products."

While the New York Times article deals specifically with a U.S. firm and U.S. securities law, these practices are prevalent in all markets, and even more so in offshore markets where lack of regulation and customer abuse is rife.

Fiduciary Standard

Arising out of a historical patchwork of regulation, different types of financial firms offering investment advice are held to different legal standards in the United States.

An investment advisor as defined under the Investment Advisers Act of 1940 is "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities."

That sounds pretty much like what every financial advisor, whether working for a bank, broker-dealer, or registered investment advisor firm, claims to do.

The difference is that a Registered Investment Advisor (RIA) is formed and regulated by the SEC under the Investment Advisers Act of 1940, and as a consequence of being formed under that Act, is held to a fiduciary standard.

That means that an RIA is legally obligated to place the interest of its clients ahead of its own and to fulfill critical fiduciary duties such as attempting to avoid outright conflicts of interest. Under this standard, an RIA is legally obligated to operate in the best interests of the client.

This is what most investors think they're getting when they work with a financial advisor or financial services firm, but that's not necessarily the case or the norm.

Suitability Standard

Broker-dealers and other non-RIA financial firms providing financial advice are not fiduciaries, which means they are not legally obligated to work in your best interest and avoid conflicts of interest. These firms are regulated under the Securities and Exchange Act of 1934 and are only required to provide "suitable advice" to their clients, even if that advice is not in the best interest of the client as under the fiduciary standard. The suitability standard does not require the broker-dealer/financial firm to place the interests of the client ahead of its own.

The Financial Industry Regulatory Authority (FINRA), the self-regulating authority that governs broker-dealers, recently announced changes to its suitability rules. The old suitability rule stated:

In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.

Under the new rules, which went into effect on July 9, 2012, an associated person (adviser or firm) shall:

Have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile.

The new rule expands the information the advisor must attempt to gather to determine suitability. It also expands the broker-dealer's suitability obligations, but falls far short of the fiduciary standard.

Why It Matters

In the old days, broker-dealers didn't give investment advice. They only executed orders to trade stock or bonds or at best only provided advice incidental to transactions executed on behalf of the client. There was arguably no need for a fiduciary standard. This has all changed today.

In an effort to bolster profits and to smooth out volatile proprietary trading revenues, banks/broker-dealers are increasingly entering the investment advisory business. The result is that different firms providing the same investment advice are being held to different standards of care in regards to their clients. Moreover, with everyone using the same titles and marketing pitch, there is no way for clients to tell the difference.

The lower suitability standard allows advisors and financial services firms to push proprietary and higher fee/commission products, conduct less due diligence, and offer less comprehensive and less constructive advice. It also affords the client significantly less recourse to address wrongs when they do occur. This to a client who thought they were working with a firm or advisor who had their best interests at heart. After all, that's what was implied in the marketing material.

Attempts to Impose a Uniform Standard

Many (including the Obama administration) believe that all firms providing investment and other financial advice should be held to the same fiduciary standard of care towards their clients. This would mean replacing the suitability standard that currently governs broker-dealers with the fiduciary standard that now governs registered investment advisors.

Obviously, broker-dealers oppose this change and have every financial incentive to avoid becoming fiduciaries. So far, attempts by the Securities and Exchange Commission and the Obama administration to impose a single fiduciary standard have been blocked by the deep pockets of broker-dealers and their heavy lobbying of Congress. This latest change in their suitability standard is an attempt to get out in front of the issue and shape the outcome.

The fight is not over, but for now, it's up to the consumer to look out for themselves and determine who is acting in their best interest and who is not.

You Need to Look Out for Yourself

While the details covered here are specific to the U.S., similar issues exist in the U.K., Australia and other developed markets. Even more caution is warranted in the offshore markets where the conflicts of interest and lack of standardized legal care to the client (not to mention outright fraud) are even more prevalent.

Before working with any advisor, ask them to show you in writing the legal standard of care they are required to follow and the regulatory authority by which they are governed. After all, it's your money and your future.

About Creveling & Creveling Private Wealth Advisory

Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future. For more information visit http://www.crevelingandcreveling.com.


http://www.crevelingandcreveling.com/bl ... heirs.html
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Oct 26, 2012 8:33 am

......at a billion or so a week, skimmed with the aid of a deceptive industry on this matter.......I predict it will be years of serious discussion by regulators and no serious intent........after all, a man on a $100,000 salary will do .................whatever he is told to do.

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Canadian securities regulators are weighing the pros and cons of imposing a stricter fiduciary or “best interest” standard on financial advisors who provide advice to retail clients.

Investor rights advocates say advisors should be held to a higher standard of care, similar to the fiduciary duty of a company executive or lawyer — and note that other jurisdictions including the European Union and the United States are moving in this direction.

But improvements to advisor responsibility and accountability in Canada have been slow to come, despite regulatory initiatives dating back to 2000.

“The application of such a standard has been the subject of much debate in Canada and internationally, and requires careful consideration to determine the right solution for the Canadian context,” said Bill Rice, chair of the Canadian Securities Administrators and of the Alberta Securities Commission.

The CSA, the umbrella organization for Canada’s 13 provincial and territorial securities regulators, published a “consultation” paper on the issue on Thursday and will be seeking comment from the investors and other market players until Feb. 22, 2013.

Related
The long, winding road to advisor reform
The paper does not draw a conclusion as to whether a new regime including a “fiduciary” standard is required, but Mr. Rice said it demonstrates the commitment of Canadian regulators across the country to examine opportunities to improve the relationship between clients and their advisers “to ensure effective protection for Canadian investors.”

In 2004, the Ontario Securities Commission proposed a Fair Dealing Model, which aimed to create a single licence for all financial service providers, and establish standards that would create understandable disclosure, meaningful communication of expectations, and effective management of conflicts of interest.



But, over the years, the Fair Dealing Model splintered off into separate efforts undertaken by the OSC, the Investment Industry Regulatory Organization of Canada (IIROC), and the Canadian Securities Administrators (CSA).

In March, IIROC began phasing in some reforms to disclosure requirements and enhancements to the standards advisers must meet when assessing the suitability of investments for their clients.

Jim Turner, vice-chair of the Ontario Securities Commission, said the current consultation will not slow down or derail other efforts to make improvements to the relationship between investors and advisors and enhance investor protection.

“It’s a broader concept,” he said, adding that the OSC is working through the CSA because the issues are relevant to investors across the country.

“We consider it an important step forward,” he said.

Michelle Alexander, director of policy at the Investment Industry Association of Canada, said her agency, which represents dealers and advisors across the country, is pleased that regulators listened to industry concerns expressed this summer and are now taking the time to study the issue before deciding if a major overhaul is required.

“It’s critically important that the CSA clearly articulates the benefits” before undertaking such an overhaul, she said, adding that unintended consequences could include higher costs and less choice for investors when it comes to advice.

Ermanno Pascutto, the executive director of investor rights advocate FAIR Canada, said the CSA consultation process is an important event for retail investors in Canada, though he acknowledged that it could be a long process because “policy development in Canada does not move at lightning pace.”

Nonetheless, Mr. Pascutto said he is encouraged that regulators highlighted the common misconception among investors that advisors must always act in the best interest of their clients.

“There is a big gap between what everybody thinks and what the law is,” Mr. Pascutto said, noting that the client’s best interests are not necessarily served under current requirements that advisors deal honestly, fairly and in good faith and make suitable recommendations.

Investor advocates are critical of structures that compensate advisers through commissions for selling certain products, rather than for the advice they provide.

http://business.financialpost.com/2012/ ... -advisors/

(as said recently by Mike: "What about recommending a two standard approach. If you call yourself a 'salesperson' then there is no fiduciary responsibility. If you hold yourself out as an advisor or similar term, you are accepting of the fiduciary responsibility. Terms like 'registered representative' are industry insider terms and should not be used to address the public.")

Mike
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Thu Oct 25, 2012 8:23 pm

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CANADIAN SECURITIES ADMINISTRATORS
CONSULTATION PAPER 33-403:
THE STANDARD OF CONDUCT FOR ADVISERS AND DEALERS: EXPLORING THE APPROPRIATENESS OF INTRODUCING
A STATUTORY BEST INTEREST DUTY WHEN ADVICE IS PROVIDED TO RETAIL CLIENTS
1) Introduction
2) Background
October 25, 2012
Administering the Canadian Securities Regulatory System

link to entire document here: [url] http://www.osc.gov.on.ca/documents/en/S ... y-duty.pdf
[/url]
and for when they remove it like they removed the FAIR DEALING MODEL PROPOSALS of the past decade (similar client protective proposals which were also put into effect on the 12th of never) it is saved here: https://docs.google.com/document/d/1Cv1p3v1W6xD0Xlm6tCC3XUMG9WxRca2d73WMrEx-wFg/edit
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Tue Sep 25, 2012 9:01 am

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Broken Brokerages: Finance Luminaries Join Fight Over Uniform Fiduciary Standard

“The trouble is that brokers are screaming, ‘Trust me, trust me, you don’t have to bother your little head. I’ll take care of you, I’ll manage your securities and give you financial planning for you and your children and everybody else,’ Tamar Frankel, a law professor at Boston University told us. “‘Trust me, give me discretion to decide what to do with [your] money.’ If that’s not fiduciary, then what is?”

Ms. Frankel was on the phone to discuss the most important consumer issue you’ve probably never heard of. For more than half a century, the financial professionals who offer investing advice have fallen into two broad categories. Broker-dealers charge commissions on the securities they trade on behalf of clients. Investment advisers charge fees, typically as a percentage of assets under management. There’s another crucial difference. Investment advisers must register with the Securities and Exchange Commission and have a fiduciary duty to act in their clients’ best interests. Brokers, meanwhile, are self-regulated and operate by the standard of “suitability.” (advocate comment NOT part of this article: the 150,000 retail broker/salespersons in Canada mostly misuse the title of "advisor" in their marketing and advertising, to avoid letting customers know they are merely salespersons)

“The brokers say they have a rule, and the rule is, they must give you suitable investment advice,” Ms. Frankel said. “I use my expertise to give you something that you can use, that’s suitable for you. But suitability doesn’t mean cheapest. It may be suitable, but you can go next door and get it at half price.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 called for the SEC to study the possibility of governing the two groups under one regulatory regime. But two years after Congress passed the law, the process has stalled. Worse, as far as Ms.Frankel is concerned, the Securities Industry and Financial Markets Association, or SIFMA, as the securities industry lobbying group is known, has put forward a vision of the rule that she said would turn the definition of the fiduciary standard on its head.

She isn’t alone. Wednesday, former chairman of the Federal Reserve Paul Volcker, Nobel-prize winning behavioral economist Daniel Kahneman and Vanguard Group founder John Bogle joined Ms. Frankel and eight other academics, investors and former regulators signed a declaration in support of a uniform standard that would require broker-dealers and investment advisers to act in their clients’ best interests. Their beef? “The fact is that brokers who are not registered with the Securities and Exchange Commission (SEC) are not required by law to put their clients first,” the statement read in part.

Or as co-signer Burton Malkiel, author of A Random Walk Down Wall Street, told The Observer: “If you’re a securities broker, you’re going to want to sell the things where you make the most money, where your commission is greatest. For me, that’s the opposite of how it should be. Investment advice should have the fiduciary duty that the customer comes first.”

The signatories to the declaration are joining the battle at a moment when the action has ground to a halt. An SEC study released in early 2011 recommended the creation of a uniform standard, and agency chairman Mary D. Schapiro has called the standard a priority. A late-2011 ETA for a proposed rule came and went, however, and in January, the SEC said it would be conducting a survey in support of a cost-benefit analysis for the rule. In support of the declaration, some of the signatories are visiting the SEC next month to argue for a fiduciary standard that would require investment advisers and broker-dealers to serve clients’ best interests and avoid conflicts.

Still, the SEC’s cost-benefit survey has yet to come out, and we couldn’t find anyone who would hazard a guess at when a rule will ultimately be proposed. “The longer it languishes, the more difficult it gets to move things along,” Dan Barry, head of government relations for the Financial Planning Association, told us, adding that he doesn’t expect to see a proposal this year.

Not only is the rule-making in a holding pattern, but there are some involved in the debate who think the sides aren’t so far apart. “SIFMA agrees something should be done, we think something should be done,” Mr. Barry told us. “There’s an unusual degree of support across a broad population of stakeholders,” agreed Barbara Roper, director of investor protection at the Consumer Federation of America.

Which isn’t to say that broker-dealers and investment advisers are joining hands and singing Kumbaya on the issue. “The investment adviser community, to my way of thinking, wants to take that statute that was designed to their business model and export it to the broker-dealer community,” Ira Hammerman, SIFMA’s general counsel, told us. “SIFMA is trying to take a more pro-investor, a more realistic approach,” he said, adding: “Customer choice is really at the center of what we’re saying.”

For their part, some investment advisers think SIFMA is trying to redefine the concept of the fiduciary standard to fit its current business model. “They say that all products now available through brokers should be available through the fiduciary standard,” said Knut Rostad, founder and president of the Institute for the Fiduciary Standard, which drafted the declaration signed by Ms. Frankel, Mr. Malkiel and others. “They are changing what the fiduciary standard means, and the additional point is that they’re changing the meaning to what the suitability standard currently is now.”

The parallel regulatory frameworks governing investment advisers and broker-dealers grew out of the stock-market crash of 1929. Broker-dealers were regulated under the Securities Exchange Act of 1934, while the Investment Advisers Act of 1940 and a series of court decisions set the standard of behavior of investment advisers registered with the SEC.

The dual structure was less of an issue in the early days, when the securities available to investors were fewer and far simpler. When a stockbroker called a customer to tout a company, the customer had a reasonable understanding of what the broker stood to gain—a commission on the securities bought and sold—and a sense that the broker would promote good investments—or risk losing future business.

As the financial products became more complex, incentives were harder to discern. Mutual funds, for instance, offered varying fee structures, allowing investors to decide how they wished to pay for the product: With an up-front sales charge that took an initial bite out of the principal, or with ongoing fees. An investment adviser registered with the SEC was required to recommend the product in a client’s best interest. A broker-dealer, on the other hand, could offer a client either one.

“If the branch manager tells you one product gets you 3 percent commission and that one gets you 7 percent, it’s the nature of human beings and capitalism and life that you’re going to sell that one,” Josh Brown, author of the blog The Reformed Broker and the book Backstage Wall Street, told The Observer. “There’s nothing illegal about it. As long as the product is suitable for the client, it can be done.”

Mutual funds, Mr. Brown said, are a tame example: “Principal protection funds, high-fee annuities. Private REITs, fucked IPOs, secondary offerings. There’s a litany of shit that you won’t find a fiduciary adviser selling.”

Which isn’t to say, supporters of the fiduciary standard would add, that brokers are bad actors by definition, but that the current regulatory regime creates situations in which the broker’s best interest may come in conflict with his client’s. SIFMA’s Mr. Hammerman didn’t dispute the point. “The broker-dealer model has many conflicts of interest,” he said. “If you’re a broker and you wanted a municipal bond portfolio, the best pricing might be trading with me because I have the best inventory for those bonds … And you say, ‘Fine, I’ll take it.’ I’m selling from my inventory a bond, and you’re buying it. We’re on different sides. There’s nothing wrong with that if you’re trading with me and I’ve given you disclosure. Or you might be more comfortable buying from a third party. The pricing might not be as favorable, but we can do that.”

That sounds a little like trusting Wall Street to deal fairly with less sophisticated investors—a notion with a history of, uh, mixed results—but Mr. Rostad said his group wasn’t trying to squelch all conflicts. “Commissions are a conflict, but they can be managed. In and of itself, proprietary products are not a conflict with the uniform standard.” The sticking point? “The issue with any conflict is, can you mitigate or manage the conflict so that you proceed in the client’s best interest?” he said.

Traditionally, broker-dealers have relied on written disclosures to mitigate potential pitfalls conflicts of interest. But disclosure is often insufficient protection: For one thing, how many investors read, let alone understand, the fine print at the back of a mutual fund prospectus? For another, academic research on the subject has shown that disclosure can create a false sense of safety with regard to conflict of interest.

Daniel Kahneman’s classic study on anchoring may indicate that once an investor has chosen to trust an adviser, a disclosure of conflict of interest is unlikely to shake the decision. The version of the uniform standard that Mr. Rostad is promoting calls for the disclosure of material facts. But a fiduciary rule that requires advisers to act in clients’ best interests would rely less on disclosure.“The bottom line of the research that we see is that even short, clear concise disclosure fails … in the sense that investors don’t believe it,” he said.

That’s one bottom line, anyway. Another is that a uniform standard is unlikely to be written anytime soon. Regardless of who wins the presidential election, meanwhile, it’s frequently speculated that Ms. Schapiro will leave the agency, making it anyone’s guess how rule-making will proceed under new leadership.

Perhaps because the battle is stalled, the crusaders for the fiduciary standard tend to take a philosophical tack. Mr. Malkiel told The Observer that he signed the declaration because he believes in the possibility of a “better world.” Andrew Golden, chief investment officer for Princeton University’s endowment, signed because the battle over the fiduciary standard is “about society, about protecting my mother and her personal account, about protecting my friends and my kids.”

“As the brokers themselves realize that they’ve signed onto something that calls for a standard of behavior, that they’re operating in companies that have signed on or been forced to sign on to that standard, it changes the appetite for the creation of certain securities and certain investments,” Mr. Golden said.

Mr. Rostad put it more grandly. “The capital markets depend upon trust, and the economy depends on the capital markets,” he explained. “We have a lot at stake in terms of making the free market economy work in a moment of historic, unprecedented levels of distrust and disgust.”

pclark@observer.com

http://observer.com/2012/08/broken-brok ... /?show=all
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Thu Sep 13, 2012 10:02 am

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Investors ‘clueless’ about fiduciary duty
By Sheyna Steiner · Bankrate.com
Wednesday, September 15, 2010

Investors "clueless" about fiduciary duty

A study released Wednesday by the Consumer Federation of America, AARP, the North American Securities Administrators Association and various investment advisor and financial planning organizations has found that investors overwhelmingly support a universal fiduciary standard and, at the same time, are very confused about which financial professionals are now held to it.

The poll questioned 2,012 Americans, 1,319 of whom identified themselves as investors. The investment questions were asked only of investors.

The poll found that 9 out of 10 investors believe that a stock broker and an investment advisor who provide the same investment advisory services should have to follow the same investor protection rules.

Nearly all, 97 percent, agreed that investors' best interests should be the priority. Eighty-five percent believe that financial professionals should disclose conflicts of interest and the source of any commissions they might receive.

Again almost unanimously, 96 percent of Americans polled believe that insurance agents should be held to the fiduciary standard.

The majority of people polled were unsure which investment professionals have a fiduciary duty to their clients.

Three out of five believe insurance agents are held to a fiduciary standard.

Two out of three believe stock brokers are held to a fiduciary standard.

In a press conference this afternoon, Barbara Roper, director of investor protection at the Consumer Federation of America denounced the policies that enabled a double standard for investment professionals.

"This survey confirms that investors are clueless when it comes to the different standards of care that apply to brokers and investment advisers. This lack of understanding is not because investors are stupid. It is because, bluntly stated, the policy itself is stupid," she said.

"No one in their right mind would create a system in which individuals who call themselves by titles and offer services that are indistinguishable to the average investor are subject to two different standards when they do so," said Roper.

The results of the survey will be given to the SEC as they consider instituting a universal fiduciary standard on all financial professionals. Their decision is expected in January.

The Dodd-Frank Act stipulated that the SEC study the issue for 6 months following the enactment of the consumer protection bill – despite the fact that multiple independent surveys have been done on the issue, all coming to the same conclusion. The survey released today repeated questions asked in 2004 and 2007.

One (high) standard for all investment professionals seems like a no-brainer but some in the financial services industry still oppose it.

The benefit for investors is obvious and, in my opinion, any opposition is indefensible. Those who are against a fiduciary standard want to continue fleecing consumers with impunity.

But, what do you think, should all investment advisors, brokers and insurance agents be held to the same standard?

Get more CD and Investing News with our free weekly newsletter.



Read more: Investors ‘clueless’ about fiduciary duty | Bankrate.com http://www.bankrate.com/financing/inves ... z26Myo5Hws

(Advocate comment about the trick of fooling the public into belief the are getting something they are not: "Anything else is fraud, because the seller is delivering a service different from what the consumer thinks he or she is buying. " Edward Waitzer, Financial Post · Tuesday, Feb. 15, 2011) (Mr. Waitzer is a Bay Street Lawyer and former Securities Commission chair, and this quote ( by another person) appeared in his article.

Full article found here: https://docs.google.com/document/d/12XJ ... caf9e71a16
Waitzer
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Sep 07, 2012 5:30 pm

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Schapiro still married to idea of single fiduciary standard
SEC boss says work continues on proposal; 'I've kept the issue alive and moving forward'


By Mark Schoeff Jr.
September 7, 2012 2:50 pm ET
Securities and Exchange Commission Chairman Mary Schapiro said she continues to champion a rule that would impose a fiduciary standard of care for anyone providing retail investment advice, an initiative that advocates say appears to have stalled at the agency.

“I still think this is a really important thing for the SEC to do for investors,” Ms. Schapiro said in an interview with InvestmentNews. “There's a fair amount of work going forward inside the building. I would like to see it happen.”

The Dodd-Frank financial reform law gave the SEC the authority to promulgate a regulation requiring brokers to act in the best interests of their clients, or provide the same fiduciary duty that is required of investment advisers. Brokers now adhere to a less stringent suitability rule when selling investment products.

After delivering a report to Congress in January 2011 that recommended a fiduciary-duty rule and harmonization of adviser and broker regulations, the agency has not acted.

Part of the problem is the crush of about 90 rules required by Dodd-Frank. Another obstacle was the dissent to the SEC fiduciary-duty report by two Republican commissioners, who said its conclusions lacked sufficient economic analysis.

The commission will conduct such a regulatory assessment before proposing a fiduciary-duty rule. It has yet to put out a request for data — even though observers have been expecting it for months.

Though Ms. Schapiro did not indicate when the agency would launch its data collection, she said the issue is not dormant.

“The industry has engaged with us in a reasonable way,” Ms. Schapiro said. “I think we've advanced the ball quite a bit. It continues to have prominence today because I've kept the issue alive and moving forward.”

But some fiduciary advocates are getting impatient.

“We see little if any sign that the agency is ready to move forward on an issue that Chairman Schapiro once identified as a priority,” Barbara Roper, director of investor protection at the Consumer Federation of America, told reporters earlier this week.

On Sept. 11, the Institute for the Fiduciary Standard will meet with Ms. Schapiro to urge her to speed up the SEC's work on the topic. That meeting is part of what the organization has deemed “Fiduciary September,” an initiative designed to create momentum for a regulation.

Ms. Schapiro said that the demands Dodd-Frank placed on the agency have contributed to the slowdown.

“At the end of the day, everything goes through a pretty small funnel,” she said. “It's more been a matter of bandwidth.”

But the issue also has generated controversy. The agency received more than 3,000 comment letters for its study. Commissioners have conducted dozens of meetings with financial firm representatives and fiduciary advocates.

A flawed rule would increase regulatory costs and litigation threats for brokers and potentially price middle-income investors out of the advice market, according to fiduciary skeptics. They have been calling for the SEC to be careful to allow a range of products, services and payment methods under a proposed rule.

Ms. Roper asserts that fiduciary opponents have emphasized cost-benefit analysis as a way to slow the rule. A federal court in 2011 vacated an SEC rule on proxy access over what it deemed weak economic justification.

Ms. Roper said Ms. Schapiro may be reluctant to proceed without the support of at least one of the two Republican commissioners.

“Republican support is seen as essential to buffer against the threat of legal action,” Ms. Roper said.
Conducting a thorough cost-benefit analysis leads to more effective rules, according to Ms. Schapiro.

“I don't think economic analysis is a roadblock,” Ms. Schapiro said. “The new economic analysis approach is informing better decision-making.”

http://www.investmentnews.com/article/2 ... _term=text
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Sep 03, 2012 6:07 pm

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NEWS RELEASE

Wednesday, August 22, 2012

John C. Bogle and Paul Volcker
Among Financial Industry Leaders
Signed on to The Fiduciary Declaration;
Urge SEC, DOL and Congress
To Apply the Fiduciary Standard
To All Advisors, Brokers

Fiduciary Declaration Unveiling for SEC Chairman Schapiro on September 11

WASHINGTON – A “Fiduciary Declaration” signed by twelve highly respected leaders in the
financial services industry urges Congress, the Securities and Exchange Commission and
Department of Labor to heighten and extend protections to investors receiving investment
advice.

The “Fiduciary Declaration," will be unveiled and discussed with SEC Chairman Mary Schapiro
on September 11. The meeting with the SEC Chairman is a highlight of Fiduciary September, an
initiative of the Institute for the Fiduciary Standard. The initiative seeks to urge policymakers
and industry participants to faithfully apply and uphold the fiduciary standard for investment
advice.

The twelve signatories of the Fiduciary Declaration are: Sheila C. Bair, Alan A. Blinder,
John C. Bogle, Peter G. Fitzgerald, Tamar Frankel, Andrew K. Golden, Roger G. Ibbotson,
Arthur Levitt, Daniel Kahneman, Burton G. Malkiel, David F. Swensen and Paul A. Volcker.
"At a critical moment in history these extraordinary leaders speak with one voice and one vision
about a fundamental truth: Fiduciary advice is right for investors; the trust it engenders is
essential for capital markets," said Knut A. Rostad, president of the Institute for the Fiduciary
Standard.

Tamar Frankel, a signatory and national authority on fiduciary law, Boston University professor
of law and Michaels Faculty Research Scholar, points out, "Fiduciary conduct is an underpinning
of the economic system, and is in danger of being effectively marginalized. Regulators and
industry participants should keep this threat in mind. Fiduciary conduct requires undivided
loyalty and the highest standard of professionalism.”

The Fiduciary Declaration states that current regulatory regimes leave a “gap” that creates
unequal protection under the law. The Declaration calls for “evenly applying the fiduciary
standard to all advisors and broker dealers who render investment advice,” and emphasizes six
core duties established by the Institute for the Fiduciary Standard that embody the fiduciary
standard. (See http://www.thefiduciaryinstitute.org)

John C. (Jack) Bogle, founder of the Vanguard Group of Funds, and a signatory to the Fiduciary
Declaration explains the importance of the fiduciary standard this way, “Our financial system is
a messy system and investors have to trust the people who are managing their money. There has
to be one North Star that is unchanging, and that is to put the interests of the client first. This
approach will win. It’s morally correct, as well as mathematically correct.”

The state of investor trust deeply concerns former FDIC Chairman and Senior Managing
Director of FTI Consulting, William Isaac. Isaac, who has received bipartisan accolades for his
often blunt criticism of policy makers and industry participants notes, "Trust -- confidence in the
honesty, reliability and fairness of people and their firms -- is essential to democracy, a free
market economy, and the financial system. The breach of trust in recent years by our government
and major financial institutions has been enormously damaging. The fiduciary standard is an
important step toward restoring confidence in our institutions and markets."

Fiduciary September

Fiduciary September features events and actions aimed to advance the fiduciary spirit and status.
It includes: urging Congress and the SEC to apply the fiduciary standard to all professionals
rendering investment advice; urging industry participants to embrace fiduciary duties when
investment advice is rendered; and educating investors about the sharp differences between
fiduciary advisors and sales brokers. Highlights of Fiduciary September events and activities
include the following:

September 5 * 11:00 AM – 12 Noon. Educational webinar for reporters.

September 11 * Unveiling of the Fiduciary Declaration. Delegation of the signatories to
Declaration will unveil, present and discuss in meeting with SEC Chairman Schapiro.
* Press availability with signatories.

September 18 * The Fiduciary Standard: What it Means and Why It’s Important, a guide aimed
at assisting practitioners in understanding the six fiduciary duties.

September 25 * “Fiduciary Forum ‘12: Regulating Investment Advice and The Benefits and
Costs to Investors and the Capital Markets of the Fiduciary Standard in Investment Advice.”
With the CATO Institute. Speakers to discuss economic, legal issues. Venue: CATO Institute.
Speakers include former SEC Chairman Harvey Pitt.

About the Institute for the Fiduciary Standard

The Institute for the Fiduciary Standard was formed in August 2011 as a non-profit, non-partisan
foundation to provide research, education and advocacy on the vital role of the fiduciary standard
for investors and the capital markets. For more information, visit http://www.thefiduciaryinstitute.org.

Contact:

Knut A. Rostad, President
The Institute for the Fiduciary Standard
Office: 703-821-6616 x 429
Mobile: 301-509-6468

http://www.thefiduciaryinstitute.org
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Aug 17, 2012 9:31 am

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TUESDAY, 14 AUGUST 2012

Minding the Chastity Belts: Fiduciary Duties and 900 Pound Lemmings
"Today investors herd around short-term investment strategies adopted by other prudent experts who manage similar funds. This has unleashed a flock of 900-pound lemmings into the economy."
Back to the Future of Pension Fund Trust Fiduciary Duties, Keith Johnson
Crusading Fiduciaries

If you were a medieval knight embarking on the twelfth century equivalent of a Mediterranean cruise, aka going off on the Crusades, you would have needed someone at home to take care of the castle, the gold and the chastity belt keys. That person was known as a fiduciary.

The fiduciary’s duties were those of loyalty and prudence; perfect qualities for today’s equivalent, the financial advisor. Sadly most financial advisors don’t see themselves in this light. Even sadder, those that do are usually to be found in that herd of 900-hundred pound lemmings that constitute the mass of behaviorally compromised investors. Time for a re-think, all round.

Duties, Not Contracts

Historically the concept of a fiduciary was to place certain duties on individuals or organizations entrusted with responsibilities to act on behalf of others; primarily where those others were less able to manage those responsibilities themselves. It’s a relationship of trust, commonly between someone who understands the issues at hand – the fiduciary – and someone who doesn’t – their client. Managing money on behalf of most private investors would generally fit that description.

However, many managers in such positions don’t regard themselves as fiduciaries, placing upon themselves the far less onerous responsibility of managing to the contract in place between them and their clients. A recent report from the UK suggests that this is wrong; and even if it isn’t most investors should run a mile or more from advisors who don’t accept fiduciary responsibilities.

Unfortunately this investment relationship has been dogged by two long and familiar shadows.

Loyalty and Prudence

Firstly, many investment advisors don’t accept the role of a fiduciary, preferring instead to rely on contracts – which usually favour the advisor, who may be able to understand them, over the client, who usually can’t. Many advisors will avoid fiduciary responsibilities because a fiduciary relationship overrides any contract – in common law, if the fiduciary breaks the terms of the trust the contract is irrelevant. This is generally covered by the first duty of the fiduciary, that of loyalty: to act in good faith, and to avoid conflicts of interests, such as taking commissions on products sold to clients, even where disclosed.

Secondly, the actual role of a fiduciary in respect of investment is governed largely by the second duty – that of prudence. In theory this means that they shouldn’t take on excessive risks. Unfortunately this has generally translated into fiduciaries believing that they have a responsibility to maximise profitability while following the mantra of efficient markets. Unsurprisingly this has led them into herd following behavior creating an attitude of "reckless caution”.

Common Law Investing

This has left investors seeking an advisor with two problems. The first one is actually finding an advisor that accepts fiduciary responsibility rather than seeking to maximise their own commissions. The second one is making sure that your fiduciary, when you can actually find them, isn’t a dumb cluck rule following junkie. Unfortunately the laws governing fiduciary responsibilities have tended to foster reliance on herding around the dubious mantra of efficient market theories such that fiduciary responsibility has tended to reduce to following Modern Portfolio Theory (MPT) and seeking to maximise short-term profits.

Naturally enough this has meant that most fiduciaries have produced the same financial returns as most of the rest of the market; lousy. Trust, it seems, isn’t enough to generate decent returns, especially when the common laws’ understanding of behavioral finance is several points under zero.

Psychopathic Markets

We’ve previously looked at the way that the legal system regards efficient markets theory as the touchstone against how investments should be managed, and why this is wrong (See: Behavioral Law and Disorder). Inevitably, however, this bias creeps into all kinds of different areas where investment advice is provided, and it’s understandable that fiduciaries measure themselves against this guidance: you can’t get sued for managing against the law, even if this guarantees your clients a whopping loss when efficient markets inevitably turn into psychopathic ones.

Of course, you’d think this behavior would cut across the duty of prudence, but the legal definition is more complex than this. Most US and UK fiduciaries are covered by something called the Prudent Investor Rule, which is governed by Modern Portfolio Theory, requiring diversification based on the requirements of efficient markets: and the introduction of this rule caused a noticeable change in the investment policies of fiduciaries as Robert Sitkoff and Max Schanzenbach noted in The Prudent Investor Rule and Trust Asset Allocation:
“Using federal banking data spanning 1986 through 1997, the authors find that, after adoption of the new prudent investor rule, institutional trustees held about 1.5 to 4.5 percentage points more stock at the expense of "safe" investments. This shift to stock amounts to a 3 to 10 percent increase in stock holdings and accounts for roughly 10 to 30 percent of the over-all increase in stock holdings in the period under study.”
The Kay Report

The recent Kay Report to the UK government on the management of UK equity markets has placed the idea of efficient markets squarely in the cross-hairs:
“We question the exaggerated faith which market commentators place in the efficient market hypothesis, arguing that the theory represents a poor basis for either regulation or investment. Regulatory philosophy influenced by the efficient market hypothesis has placed undue reliance on information disclosure as a response to divergences in knowledge and incentives across the equity investment chain. This approach has led to the provision of large quantities of data, much of which is of little value to users. Such copious data provision may drive damaging short-term decisions by investors, aggravated by well-documented cognitive biases such as excessive optimism, loss aversion and anchoring. “
The report suggests that all intermediaries should be required to manage to fiduciary standards, not just those that choose to, and that the adherence to MPT and efficient markets needs to be removed:
“Asset holders should recognise that diversification is most likely to be achieved by a diversity of asset management styles, rather than by calculations derived from an asset allocation model, the employment of a large number of managers, or the selection of a large number of stocks. “
Sea Changes

If this report was ever acted upon it would represent a sea-change in the way advisors and their clients interact. Advisors would be legally obliged to avoid – not manage – conflicts of interests and would be expected to “take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide” (Learoyd v Whiteley (1887) 12 AC 727). Simply implementing asset allocation against the MPT would no longer meet this requirement.
“The Review does not believe that there could be any sound basis for placing trust in an intermediary who does not recognise these duties of loyalty and prudence, and considers that a relationship that falls short of these standards fails to show appropriate respect for an investing client … Caveat emptor is not a concept compatible with an equity investment chain based on trust and stewardship. “
Of course, the chances of these recommendations ever seeing the light of day are limited; but that doesn’t mean that we shouldn’t judge our advisors by these standards. An advisor that isn’t a fiduciary isn’t safe and a fiduciary that doesn’t understand the limits of efficient markets theory and can’t provide evidence for how they’re guarding against behavioral biases should be avoided (see Clueless: Meet The Overprecise Pundits).

This is our money, not theirs. We’re owed a duty of loyalty and prudence. Otherwise when we get back to our castle we’ll find they’ve unlocked the chastity belt and run off with the gold and the rest of the lemmings.

http://www.psyfitec.com/2012/08/minding ... .html#more
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Jun 04, 2012 3:24 pm

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Washington INsider
The adviser's window into political and economic developments

Bachus bill could shutter 41% of advisory firms in this state, survey finds
Small firms in Massachusetts could be decimiated: Finra cites 'critical need to fill an untenable gap in investor protection'

By Mark Schoeff Jr.
June 1, 2012 12:30 pm ET
When the House Financial Services Committee holds a hearing next week on legislation that would shift the oversight of investment advisers from the Securities and Exchange Commission to an industry organization, opponents of the bill are going to try to hit the Republican sweet spot by arguing that the measure will hurt small advisory firms. And they have data to back up their contention.


June 6 is D-Day for SRO legislation
Related to this story »

Finra under fire
FSI goes with 'devil we know' in oversight of advisers
SEC: Firm lied about execs' 'skin in game'

A poll released by the Massachusetts Securities Division on Thursday shows that most Bay State investment advisers oppose an SRO because they believe it will foist exorbitant new regulatory costs on them.

The Massachusetts securities office said in a statement that “41% of those who [responded] volunteered comments that the bill as presently drafted was likely to put them out of business.”

More than half of the state's 649 advisers participated in the poll, with 79% of them reporting less than $30 million in assets under management and nearly all of them having fewer than five employees.

“State-registered IAs are independent small business men,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement. “Imposing a national self-regulatory organization on them would create a financial burden with no guarantee of better protection for investors.”

The North American Security Administrators Association is scheduled to testify at the SRO bill hearing on June 6. Their witness is certain to mention the Massachusetts poll.

At the same time, the Financial Industry Regulatory Authority Inc., which also will testify and is pushing to become the adviser SRO, probably will point out that under the bill state-regulated advisers won't be examined by the SRO in states where exams are conducted at least every four years. All advisers with retail clients, no matter their size, would have to pay membership fees to the SRO. But those fees would have to be approved by the SEC, which would oversee the adviser SRO.

The dispute over the price of an SRO likely will be highlighted at the hearing. A Boston Consulting Group study, released in December and sponsored by SRO opponents, said that an SRO would cost twice as much as adequately funding the SEC. Finra later released its own estimate that showed much lower costs.

The challenge for the anti-SRO forces is that as they target one GOP totem – small business – they're going up against another Republican touchstone – Wall Street. Wall Street firms exert plenty of influence over Democrats, too.

The champions of the bill are House Financial Services Chairman Spencer Bachus, R-Ala., and the Democrat with whom he introduced the measure in April, Rep. Carolyn McCarthy of New York.

Mr. Bachus argues that he's trying to increase investor protection by turning over adviser examinations to an SRO. He notes that the SEC examines annually only about 8% of the nearly 12,000 registered advisers compared to the 58% of brokers that Finra, the broker SRO, examines every year.

Although Mr. Bachus' bill would authorize one or more SROs, it's clear that he favors Finra for the job.

The idea of being regulated by Finra sends chills down the spines of most advisers. They say that Finra is biased toward brokers, in the pocket of Wall Street and lacks the expertise to administer the fiduciary standard of care advisers must give their clients. Brokers are held to the less stringent suitability standard when recommending investment products. (advocate comment: I must jump in here and point out the greatest fraud, or "bait and switch" in North America today, namely the pawning off of "brokers", to the public as "advisors". They are leading customers to believe they are getting a trusted, trained professional, whilst delivering only a commission broker. This is fraud, of a criminal nature, in my opinion. Look up your definition of fraud (or misrepresentation) in your own criminal code, here in Canada it is section 380.)

Finra asserts it is the best candidate to be the adviser SRO. The regulator has tried to reassure advisers by saying that it would create a separate governance structure for them that would be sensitive to the characteristics of their business model.

It is unacceptable, according to Finra, that the SEC examines advisers only about once a decade, with 38% never having been examined.

There is a “critical need to fill an untenable gap in investor protection in the investment adviser space,” Finra said in a statement. “One or more SROs overseen by the SEC is a proven way to augment government resources and to provide the needed oversight.”

A Finra witness will make that case in the June 6 hearing. Finra is one of four witnesses invited to testify by Republicans, according to sources with knowledge of the witness list. The others are the Securities Industry and Financial Markets Association, the Financial Services Institute and the National Association of Insurance and Financial Advisors.

The witnesses invited by Democrats are NASAA and the Investment Adviser Association.

Here's what I'll be watching for next Wedneday:

1. Will there be any chinks in the Republican armor? Will anyone in the GOP express skepticism of the SRO bill in defiance of his or her chairman? It would be unusual for a Republican to break ranks in the highly disciplined House. But if the GOP had been in lockstep on the measure, it might have gone straight to a committee vote rather than be subject to a hearing.

2. How many Democrats besides Ms. McCarthy will come out in favor of the bill? The top two Democrats are already on record opposing it – House Financial Services Committee ranking member Barney Frank, D-Mass., and Rep. Maxine Waters, D-Calif.

3. How many Democrats will express support for authorizing the SEC to charge user fees for exams? An SEC study in January 2011 recommended three ways to increase adviser oversight: allow the agency to charge user fees; create an SRO; or expand Finra's authority to include advisers dually registered as brokers. Each option requires congressional approval.

4. Will SRO opponents be able to convince Republicans that an SEC user fee is not the equivalent of a new tax?

Those questions may not be answered definitively. But it's certain that we'll hear an argument like this one:

“If Chairman Bachus achieves the hostile takeover of small business owners in our industry, he will drive good men and women out of business and harm the consumers they work so hard to serve,” Susan John, national chairman of the National Association of Personal Financial Advisors, said in a statement this week.

http://www.investmentnews.com/article/2 ... term=text#

see also article and post related at viewtopic.php?f=1&t=172#p3357
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon May 14, 2012 7:18 pm

fair, honest good faith rule.jpg

click on the image to enlarge

Isn't OSC Rule 31-105 essentially a fiduciary standard?

OSC Rule 31-505 requires all dealers
and their Ontario registered representatives to “deal fairly, honestly and in good faith with
clients.”

Although regulators and Ontario courts have not yet recognized that it does so, this rule
arguably imposes a fiduciary obligation on Ontario registrants with respect to their clients. This
goes far beyond the suitability rules of the MFDA http://www.mfda.ca and IIROC http://www.iiroc.ca , two
self-regulators .

[url]http://www.osc.gov.on.ca/documents/en/Securities-
Category3/rule_20090918_31-505_unofficial-consolidated.pdf [/url]

A fund salesperson who
knowingly sells an expensive mutual fund to a client whose needs would be satisfied by a lessexpensive
product cannot be fulfilling the obligation to act fairly and in good faith that is
imposed by OSC Rule 31-505.

Source: Read this piece by lawyer Phil Anisman
http://opinion.financialpost.com/2011/0 ... -requires-
%E2%80%98good-faith%E2%80%99/

(advocate comment: the investment and regulatory regime is so morally confused that they claim a duty to “deal fairly, honestly and in good faith with clients”, at the same time that they secretly alter standards of practice to allow their salespersons to call themselves "advisors", and to not even have to put client interests first or to disclose conflicts of interest. Folks who live on willful blindness need to always work things both ways to their favour:) (see image below)

Screen shot 2011-08-11 at 12.10.02 PM.png

click on image to enlarge
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon May 14, 2012 8:49 am

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FP COMMENT
FP Letters to the Editor: Existing rule requires ‘good faith’
Special to Financial Post Feb 15, 2011 – 10:49 PM ET

Comments Email Twitter
inShare

Re: “Cracking down on commissions,” Edward Waitzer, Feb. 15

Edward Waitzer’s column, while laudably advocating an obligation on the part of securities registrants, both dealers and advisors, to provide advice that is in the best interests of their clients, fails to mention an existing requirement in Ontario that may impose this obligation.



OSC Rule 31-505 requires all dealers and advisors registered in Ontario and their registered representatives to “deal fairly, honestly and in good faith with [their] clients.” Although our courts have not yet recognized that it does so, this rule arguably imposes a fiduciary obligation on Ontario registrants with respect to their clients.

To take Mr. Waitzer’s example, a salesman who sells an expensive high-end laptop to a customer whose needs would be satisfied by a less-expensive product cannot be fulfilling the obligation to act fairly and in good faith that is imposed by OSC Rule 31-505.

It is also difficult to understand how an advisor who fails to provide advice that is in the best interests of its client would be acting fairly. Indeed, Mr. Waitzer’s admonition at the conclusion of his article is that we not be perceived to lag behind other countries “in our efforts to ensure fair dealing in financial markets” (emphasis added).

The suitability obligations of Canadian dealers and advisors are an element of fair dealing. So are the requirements in Canadian rules that registrants identify potential conflicts of interest and manage them appropriately, either by disclosure or by total avoidance.

It is worth noting in this respect that the American initiative toward the imposition of fiduciary obligations on broker-dealers who provide advice has disavowed any intention to prohibit their being compensated by means of commissions.

In light of OSC Rule 31-505, one might wonder whether the debate in Canada is as much about labels and attitudes as it is about legal obligations. Our regulators may be better advised to adopt the Ontario rule nationally and enforce it rigorously.

Philip Anisman

http://opinion.financialpost.com/2011/0 ... -requires-‘good-faith’/

===============

Best interest? I think not. This seems to have been quietly changed by the various "stakeholders" involved, without bothering to involve the public, the largest stakeholder. Ain't self regulation great? Read the book Willful Blindness.

Screen shot 2011-08-11 at 12.10.02 PM.png
Click to enlarge

The image above is what the "stakeholders" use in 2011 for standard of care to Canadian customers.

CLIENT FIRST 2000-1.jpg
click to enlarge image

while this image (above) is from the Canadian Securities Institute Conduct and Practices Handbook for licensing. It outlines the standard of customer care that the industry pretends to deliver to the public. A magnificent fraud that helps the industry to skim one billion dollars a week from the public. (source http://youtu.be/aNh5laKO22o )

(thanks for this go to ken at canadian fund watch.com http://www.canadianfundwatch.com/files/news-201204.pdf )
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sun May 13, 2012 10:00 pm

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Guest column: Whose responsibility is suitability?

Advisors and their firms should avoid the growing trend of blaming clients if it is their own processes that are at fault
By Harold Geller, John Hollander | May 2012

At the core of the relationship between financial advisors and their clients is the assessment of the client's financial situation by the advisor - an investigation intended to match the client's financial goals with the planning and financial products recommended by the advisor. In other words, what financial choices are suitable for the client, given his or her particular situation?

It sounds straightforward. But, as most advisors know, the "know your client" process can be fraught with peril if it is not conducted and documented thoroughly. Witness the rising number of lawsuits against advisors and their firms to recover financial losses. These lawsuits almost always focus on the suitability issue, with even the most sophisticated plaintiffs alleging that they were advised to make financial decisions that were unsuitable for them, leading to catastrophic losses.

So, it's very much in the interest of advisors and their firms to ensure that they are fully aware of their obligations in this regard. Indeed, the Mutual Fund Dealers Association of Canada and the Investment Industry Regulatory Organization of Canada have established "know your client," "know your product" and "suitability" as the bedrock of the client/advisor relationship.

In our experience, problems often arise because some advisors may not have informed themselves as fully as they should have about their clients' situations (KYC), the features and details of the investments they have recommended (KYP) and how those two investigations should be applied to the client's situation (suitability).

But even if all of these steps have been taken, the advisor is still at high risk for a ruling of liability if he or she has failed to document the suitability process fully. This type of failure leaves advisors and their firms struggling to prove what is their most common defense - that the client made properly informed choices.

Indeed, it is typical for defendant advisors and firms in civil claims and disciplinary hearings to place the blame for client losses on their clients. These defendants often point to the "sophistication" of the client and the apparent understanding by the client as proof that the client was fully aware of his or her investment choices. The client's sophistication in employment, business experience or education is often mistaken for investment knowledge. So is the client's history of giving approval of recommendations.
So, who is responsible? And for what?

Clearly, the advisor and the dealer jointly bear the responsibility to recommend an appropriate match between the product and the client. Despite widespread investment industry misunderstanding to the contrary, suitability analysis is never the responsibility of the client. IIROC Rule 1300.1(q) requires that both dealer and advisor, "when recommending to a customer the purchase, sale, exchange or holding of any security, shall use due diligence to ensure that the recommendation is suitable for such customer." MFDA Rule 2.2.1 is similar. Nowhere is this obligation for ensuring suitability imposed on the client - even in the case of unsolicited orders.

This debate effectively ended in Canada when the Alberta Securities Commission declared (in Re Lamoureux, 2002) that the responsibility for ensuring suitability rests solely on advisors and dealers: "The obligation to ensure that recommendations are suitable or appropriate for the client rests solely with the registrant. This responsibility cannot be substituted, avoided or transferred to the client, even by obtaining from the client an acknowledgment that they are aware of the negative material factors or risks associated with the particular investment." This decision has been adopted extensively, including in the decision of the Ontario Securities Commission in Re Daubney, 2008, and that of IIROC in Re Gareau, 2011.

Advisors and their firms have every right to protect themselves from a liability finding by clearly establishing that they have met the suitability standard. The best way to do that is to be thorough in carrying out the suitability obligation and by fully documenting that process. It is this process, not the result, that advisors must answer for.

Indeed, it can be argued that the intentional denial of a regulatory obligation, such as the suitability obligation, is itself a breach of both the regulation and the civil duty of care owed to the client.

When looking for evidence to support the conduct of the advisor, firms are well advised to avoid blaming the client, as is the current trend. Advisors and dealers promote their skills and assessment processes to their clients. When an advisor error is alleged, the advisors and dealers should do one of two things: either they should show how they complied with suitability standards or they should own up to their responsibilities. Failing that, further regulatory and judicial sanctions against the advisor and his or her firm are necessary to serve as a general deterrent against these types of failures. IE
Harold Geller and John Hollander are senior associates with Doucet McBride LLP. This commentary is not intended as legal advice.
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