fiduciary or not? a "Bait and Switch" game

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

Postby admin » Thu Jan 16, 2014 4:31 pm

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Bill Rice hit the nail on the head when he said…

“When I interviewed for the position as Chair and CEO of the Alberta Securities Commission now close to nine years ago, I was asked about my views on self-regulation. Being a lawyer and having enjoyed the privilege of the self-regulation of the legal profession for some 32 years, I did not have much difficulty in quickly expressing my support.”

(In the legal profession the existence of a fiduciary standard aligns both the incentive and the standard. Whether he realises it or not, Bill Rice has unwittingly argued for the introduction of best interests standards as a solution to the regulatory burden.)
Read the full article here:

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

Postby admin » Sun Jan 12, 2014 11:04 am

Two similar views of the problem of abuse by financial professionals.

First my own simple analogy, with a visual, showing how I believe the investment industry gets to make additional billions, while cheating or shortchanging investment consumers. (note, this applies to Canadian as well as US investors)

Second, a publication by a major Canadian law firm speaking to the same issue in terms more understandable to those who prefer legalese. (theirs is better, mine shorter:)


#1. The photo on the top is the industry promise, and the photo on the bottom is the industry delivery, about 80% of the time. Simply put, the industry ability to mislead customers into a false sense of trust in commission salespersons, while implying and pretending that they are trusted professionals, is the foundation for cheating 330 million North Americans out of hundreds of billions of dollars.

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#2. This report by Canadian law firm is well done and explains it in better language than I can. link to their document here ... ticle-link
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Dec 20, 2013 10:38 am

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News from
Advisers, and rules they thrive by, need to come out of the shadows

Thursday, December 19, 2013
Canadian securities regulators have put off making a decision on whether to impose tougher rules on mutual fund commissions and other aspects of the relationship between financial advisers and their clients. Instead, they're going to do some more nattering and weighing of the information they've been gathering.

That has brought shouts of joy from some of Canada's financial advisers. Advocis, the advisers' lobby group, and its investment allies have been fighting a rearguard action against any moves that would force the industry to abandon its opaque commission practices, put an end to egregious conflicts of interest and start treating clients as if their interests actually come first.

Last month, the industry released a report it commissioned that just happened to reach the conclusion it was seeking: "There is no gap in Canada that need be or could be filled by imposing further statutory obligations on investment advisers and dealers."

The industry would settle for endless jawing that puts off as long as possible any interference with a business model that works extremely well for everybody but the overpaying customer. That means keeping things like the actual costs to investors hidden and avoiding more stringent safeguards that would it make it easier for aggrieved clients to sue advisers who steer them into inappropriate securities for the sake of fatter commissions.

"This cautious and reasoned approach is the right course because there's so much at stake," Advocis president Greg Pollock intoned in a statement. "A wrong decision could have devastating consequences, so we're relieved that the regulators are taking the time to consider all the facts."

Advocis and its advocates are working particularly hard to preserve the commission fees embedded within mutual funds. The industry-wide practice of paying trailing commissions is a terrific lure for financial planners - even as it leaves them open to obvious conflicts of interest. Most sensible people, including the Ontario Securities Commission's investor advisory panel, want the practice prohibited.

Advocis's ludicrous response is that this "would drive up the cost of financial advice, making it unaffordable for hundreds of thousands of middle-class Canadians." It doesn't mention that Canadians already pay far too much in both open and hidden costs compared with investors in other countries.

In response, the lobby group warns that costs are already shooting up in Britain, where millions of people could wind up as "financial advice orphans" as the result of new regulations.

Yikes. Is it really better to have a conflicted adviser peddling expensive funds to unsuspecting investors for personal gain? Frankly, I'd rather be an orphan.

Financial advisers regard themselves as well-trained professionals providing impartial advice based on their extensive homework and in accord with their clients' goals, incomes and levels of risk tolerance. Many do fit that description; the others could start by taking their murky compensation deals out of the shadows and committing themselves to putting their clients' interests first.

It's called fiduciary duty, and the industry should stop acting as if this would mean sure financial ruin. Other professionals, such as lawyers and accountants, have become quite prosperous with transparent fee-for-service arrangements.

Instead, Canadian advisers seem to prefer their role as well-compensated salespeople, raking in fat commissions for peddling securities that may or may not be in their clients' best interests, but most certainly are in theirs.

(see GET YOUR MONEY BACK topic at for more about the worlds greatest "bait and switch")
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sat Dec 14, 2013 9:56 am

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"...Advisors who must meet a “suitability standard” are required only to offer advice that’ssuitable for their clients, which means they can suggest products that earn them big commissions but that aren’t necessarily the best choice for the client. Financial advisors who must meet a “fiduciary standard” are legally obligated to put their clients’ interests first.Think of it this way. Some advisors say, “If there are two products and they’re both decent, I’ll always select the one that pays me more.” But others say, “If there are two products to choose from and they’re both similar and appropriate, I’ll always select the one that costs the client less.”....."

Interview with Steven D. Lockshin, author of Get Wise to Your Advisor
All of us could use some advice on how to manage our finances. But Steven D. Lockshin says we ought to heed a billboard-sized warning: Be careful out there.

“[T]he financial advice industry,” he says in his important new book Get Wise to Your Advisor: How to Reach Your Investment Goals Without Getting Ripped Off, “has more built-in conflicts of interest than almost any other industry.”

Lockshin knows whereof he speaks. He’s consistently been one of the top-rated financial advisors in the country by Barron’s and for 20 years he ran his own fee-only, conflict-avoiding advisory firm. Now he’s helping the rest of us figure out whom we can trust for honest guidance about money matters.

Because the book was so revealing, I asked Lockshin to answer some questions about his book for readers. He’s also provided an outstanding 8-page PDF on the questions you should ask anyone aiming to give you financial advice.

At the heart of the book is the distinction between advisors who must meet a “suitability standard” and those who must meet a “fiduciary standard.” It sounds a bit wonky, but it’s a big deal. Explain.

Advisors who must meet a “suitability standard” are required only to offer advice that’s suitable for their clients, which means they can suggest products that earn them big commissions but that aren’t necessarily the best choice for the client. Financial advisors who must meet a “fiduciary standard” are legally obligated to put their clients’ interests first.

Think of it this way. Some advisors say, “If there are two products and they’re both decent, I’ll always select the one that pays me more.” But others say, “If there are two products to choose from and they’re both similar and appropriate, I’ll always select the one that costs the client less.”

Ok. So how do I determine which is which?

In its simplest form, a fiduciary – a true steward of your financial well being – will always place your interests first. Full stop. Any conflict of interest should be a yellow (if not a red) flag that your advisor may be tempted to put their interests before yours.

What else should we be looking for in an advisor?

Make sure your advisor has the skills and qualifications to meet your needs. Check his or her violations history through FINRA’s or the SEC’s website and ask lots of questions to understand the advisor’s level of education and experience in the financial services industry. You’ll be surprised to know that there are almost zero education requirements to become a financial advisor.

Do all of us really need an advisor? Can’t we do a lot of this work online on our own?

It’s possible to handle your investments and savings on your own, provided you possess one important skill – discipline. There are also online solutions like or and others that automate investing and savings for you at a fraction of the cost of retail advisors – and do it quite well! However, here’s the key: The math is simple, but the emotion and discipline are not. Much like dieting, most of us know what to eat and how to exercise; yet we often need a trainer or dietician to assist with our discipline. A good financial advisor can help with that discipline.

What’s one thing Pink Newsletter readers could do today to improve their chances of successfully navigating their financial futures?

Probably the most important thing is making an honest assessment of one’s current situation. Ask a few really simple, but extremely important, questions. For example:

1) Am I disciplined about my financial planning process or do I rely on someone else to do my thinking for me?

2) Do I truly understand what I am paying in fees?

3) If I do rely on someone else, am I confident that person is dedicated to meeting my needs without any economic conflicts of interest that could get in the way?

4) Have I religiously searched for the best advisor to meet my needs by asking tough questions rather than making an emotional decision?

For more, check out the book Get Wise to Your Advisor: How to Reach Your Investment Goals Without Getting Ripped Off and this free PDF on the questions you should ask any prospective advisor. ... r-advisor/
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sat Nov 23, 2013 10:03 am

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It took Tony Warren more than two decades to change his mind about investment advisers.

“I had a very good broker – a tremendous guy, very intelligent,” Mr. Warren says of his adviser at Canaccord Genuity Wealth Management in Edmonton. The two men had a good rapport, but “I still always felt like I was being herded into things.” Instead of looking for long-term investments, “they would get hot on a stock and get me into it. ... If I wouldn’t trade, they would get upset.”

The vast majority of investment advisers are paid through commissions. Each time they buy or sell shares, their clients must pay them a fee for executing the trades. For them, the most lucrative customers are people like Mr. Warren, who has the sort of healthy six-figure portfolio that can support frequent trades.

For years, Mr. Warren went along with his broker’s advice. His annual fees and commissions amounted to tens of thousands of dollars. “I didn’t think there was another game in town,” he says. Over time, he started to question his adviser’s motives, and began ignoring his pitches to invest in junior mining and energy stocks.

That did not sit well with his adviser, and the relationship frayed. About three years ago, he says, “they ‘fired’ me.”

At first Mr. Warren was confused. How could he be dismissed as a client? Now he says it was the best thing that could have happened to him. His anger pushed him to do some serious research, which led him to the conclusion that he never should have settled for an adviser who saw him as a fee machine. (Canaccord Genuity declined to comment on its relationship with Mr. Warren.)

Canadians who have found themselves in Mr. Warren’s situation can take some solace that regulators are watching. For the first time in two decades, the country’s provincial securities watchdogs have proposed significant reforms to the multibillion wealth management industry and the fees and incentives that advisers receive.

Regulators have already laid the groundwork for more robust disclosure of the fees that investors pay, and mutual fund companies may have to curtail the amounts they pay to advisers in return for selling their products. These are, potentially, radical shifts in a business that has been slow to change. Dave Agnew, head of Canadian wealth management at Royal Bank of Canada, calls it the “largest challenge that the wealth management industry has faced in many, many years.”

Yet some advocates for reform are skeptical about their chances of success. The major chartered banks are a powerful lobbying force, and they have become more dependent than ever on fees from wealth management – it’s a safe harbour as other streams of revenue decline. And despite the regulators’ copious legwork, which includes holding hearings and a conducting a thorough study of mutual fund fees, critics are unimpressed. They say they have seen this all before.

In 1994, the Ontario Securities Commission hired retired securities lawyer Glorianne Stromberg to study the industry’s problems and to propose fixes. Her report was scathing, but little changed. Today her proposals are even bolder, going so far as outlawing the title “investment adviser.” “It’s a travesty,” she says. Clients hear the word “advice” and think the brokers will always look out for their best interest. A more accurate job title, in Ms. Stromberg’s view, would simply be “salesperson.”

Canadians have more than $3-trillion in financial wealth, and pay billions in fees and commissions annually. Will the securities watchdogs have sufficient grit to crack down on conflicts of interest in how that money is managed? Or will backroom pressure by financial institutions put the kibosh on their efforts?

Paid according to ‘the grid’

The list of critics who believe the current system is a blight on the industry includes some individual investment advisers. Ottawa’s Marc Lamontagne came to resent the commission model. “I thought I was a financial planner,” he says, reflecting on his early days in the industry during the 1990s, working for now-defunct Regal Capital Planners. “In actual fact, what I should have been was a salesman. That was the only way to make money.”

It wasn’t long before Mr. Lamontagne, who is now an independent financial planner, shunned commissions for a model that charged his clients a fixed percentage of their portfolio each year. Today his clients have a firm grasp on what they will have to pay, and everything is in the open.

That differs from the prevailing model, which gives investment advisers a strong incentive to maximize their commissions. Across Canada, the vast majority of brokers are paid according to “the grid,” a sliding scale that dictates what cut of client fees flow to them, and what percentage their firm keeps. At CIBC Woody Gundy, the retail brokerage arm of Canadian Imperial Bank of Commerce and one of the largest such firms, an adviser whose revenues amount to $375,000 a year brings home, on average, 38 per cent of that, or $142,500, according to a copy of the bank’s grid obtained by The Globe and Mail.

While the exact percentage fluctuates from firm to firm, they share a key principle: The more an adviser brings in, the bigger his or her slice of the pie becomes. Brokers who generate revenues of at least $1-million a year are usually entitled to at least 50 per cent of the fees they bring in.

Commissions, not investor returns, also dictate industry status. Retail brokerages typically reward their top advisers by admitting them to special clubs – BMO Nesbitt Burns’ is known as the President’s Council – even though the designations often have no connection to portfolio performance.

To hit these targets, advisers rely on more than trades. Mutual fund companies offer advisers a split of the annual fees that investors pay them to manage their money. These payments, known as trailer fees, typically add up to 1 per cent annually.

Fund companies argue that these fees compensate brokers for their ongoing research and due diligence. In private, industry executives admit that trailer fees exist only to encourage brokers to sell their products. “If it doesn’t pay a trailing commission, it doesn’t make it onto [a broker’s] product shelf,” says John DeGoey, who now manages Mr. Warren’s money and is one of the most vocal investment advisers in favour of reforms. “That limitation is one that most clients are oblivious to.”

Fund companies can remunerate advisers so generously because Canadians cough up some of the highest mutual fund fees in the world. There’s plenty of money at stake: Mutual funds remain the country’s most widely held type of investment, with assets of $762-billion as of December, 2011.

Advisers can also earn extra commissions for helping their firms sell share offerings. If, for example, Enbridge Inc. sells stock in order to raise money for pipeline construction, the investment banks will entice their advisers to purchase the new shares for their clients by paying them a special 50/50 commission. If the bank earns 4 per cent in fees – or $4-million on a $100-million share sale – the adviser will earn a 2 per cent cut on each share they convince their clients to purchase. An adviser who sells $1-million worth of new shares earns a cheque worth $20,000 – often in a matter of minutes.

Advisers are so richly rewarded partly because investment banks are in an arms race to build the most powerful sales force. National Bank of Canada, for one, has invested heavily in expanding its network of investment advisers by buying investment dealer Wellington West and the advisory arm of HSBC Bank Canada in 2011. And this summer, National more than doubled the size of its network of independent retail advisers, who pay National both for the right to use its back office systems and to participate in the share offerings that its investment bank underwrites. “That’s why we’re in so many deals,” chief executive officer Louis Vachon said recently.

Then there are the less conventional avenues for earning fees. Unlike mutual funds, which earn steady annual management fees, hedge funds earn both a small annual fee from their investors, plus 20 per cent of any returns above a certain threshold.

Earlier this year, senior managers at a Canadian hedge fund met with top retail brokers across the country to pitch their products. Officials with the hedge fund, which asked to remain anonymous for fear of retribution from banks, said the reception seemed generally positive. But when they followed up with advisers to see if there was any sales interest, the message suddenly changed. A top broker at a Big Six bank shrugged the firm off, explaining that “we will only do funds [in which] we participate in the performance fees,” according to an e-mail obtained by The Globe and Mail. The adviser wanted a cut for simply placing clients in these funds, even though the investors and the fund managers absorbed all the risk.

A fee-based model

Facing the prospect of a changed rulebook, financial institutions say they have an easy fix: shepherding clients toward fee-based accounts, as Mr. Lamontagne does. Advisers are paid a straightforward percentage of the money they manage – typically about 1 to 2 per cent of the assets under their watch – and they forgo mutual fund trailer fees and commissions on stock trades.

Because the fee structure is simple and clearly stipulated, advisers are free to work in the best interests of their clients. They are also incentivized to earn superior returns for their clients: The more the portfolio grows, the more they get paid. This model is quickly becoming the new norm outside of Canada. Recently the U.K. and Australia banned commission-based accounts, and there is speculation that the European Union will soon follow suit.

Yet fee-based accounts have existed for years in Canada, and only a small fraction of investors have heard of them. Investor Economics, an independent industry research outfit based in Toronto, concluded in June that fee-based accounts “have yet to gain significant traction in terms of assets or adviser penetration,” and found that they only make up 28 per cent of client assets outside of mutual funds.

Some investors, unlike Mr. Warren, prefer the commission model exactly because it incentivizes their brokers to buy and sell often and, ideally, earn quick profits.

The fee-based model can also be gamed. Advisers who asked to remain anonymous because their organizations do not allow them to speak to the media told The Globe and Mail that a number of their peers are secretly “double-dipping”: running fee-based accounts while still collecting trailer fees and commissions on sales of new securities.

The issue blew up at Royal Bank of Canada this spring, according to a source within the company, prompting the bank to crack down in a number of closed-door meetings. No official notices or decrees were sent out, but a number of advisers were reprimanded. Mr. Agnew, the bank’s Canadian wealth management head, acknowledged the actions in an interview, adding that RBC’s compliance department monitors client accounts closely to catch such behaviour.

Wealth management bonanza

Regulators have made some headway. This past summer, provincial securities regulators started phasing in new rules that require advisers to disclose to clients the full amount they paid in fees and commissions each year. Financial institutions have backed such reforms. “We support full disclosure,” says Rajiv Silgardo, head of BMO Asset Management. Investors “need to know all the costs that they will bear.”

But Mr. DeGoey, one of the advisers who backs major reforms to how the industry’s 22,000 brokers are paid, worries that the changes will stop there. He argues that the industry only supports “these wussy disclosures that don’t really alter behaviours.”

Part of the problem is that the existing system has served financial institutions well. Wealth management has become a major profit centre. Sun Life Financial Inc. recently re-launched its asset management business, and each of the Big Six banks made wealth management acquisitions or invested heavily in their existing businesses in the past three years. Wealth management now accounts for 20 per cent of Bank of Nova Scotia’s profits, up from 3 per cent a decade ago. As their traditional operations struggle, wealth management makes up between 35 and 45 per cent of some life insurers’ bottom lines. The pressure to keep their wealth management businesses growing will not abate any time soon.

The official line is that the current system has served customers well too. “The current advice compensation model in Canada aligns the dealer’s and adviser’s compensation with the client’s goals,” Mackenzie Investments wrote in a public letter to the Ontario Securities Commission this summer. A unit of DundeeWealth, now owned by Bank of Nova Scotia, also wrote to warn against the more radical reforms of the U.K. and Australia: “The commission-based model is suitable for some investors while the fee-based model is suitable for others.” Canadian regulators “should not dictate that only one option is available.”

Reaching consensus on a new rulebook will not be easy. Not only do the provincial securities commissions amount to a patchwork quilt spread across the country, they must collaborate with industry-specific, self-regulating bodies such as the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, each of which have their own priorities.

The groups must also withstand heavy backroom pressure. Ed Waitzer, the OSC chair who hired Ms. Stromberg to conduct her research in the 1990s, recalls facing huge resistance when he tried to act on it. “There was a lot of lobbying going on behind the scenes,” Mr. Waitzer said. Financial institutions dragged out discussion of the initiatives for years until the proposals eventually died.

Mr. Waitzer is sympathetic to those who believe nothing will change this time around. “As regulation has become bureaucratized, regulators have gotten in the same habits of politicians: making it look like we’re solving problems, rather than actually solving problems,” he said.

He thinks the regulators should opt for simple, but powerful, rules. In the U.K., he said, the Financial Services Authority recently implemented reforms that hold senior managers’ feet to the fire. If something happens under their watch, the bosses are responsible. Mr. Waitzer also argues in favour of creating standard, low-cost funds that would be the default choice for the risk parameters of the average investor.

For now, the OSC, the country’s most powerful regulator, won’t say much because it is in the midst of its mutual fund review. In June, the commission held a public roundtable to hear from industry voices, and it is still doing research. The last thing the OSC wants is to seem biased in either way in the midst of the process.

However narrow, there appears to be a window for change. The banks’ position is that they are willing to go along with some sort of overhaul. Exactly what that will look like is the question.

“I do not apologize for charging for advice,” says Glen Gowland, head of Scotiabank’s private client group. “But a client should know what they’re paying for, they should be able to understand how much they’re paying for that, and then be able to measure, ‘Did I get good value for what I paid?’ ” ... /?page=all
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Nov 15, 2013 10:10 am

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The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice
by Michael Finke, Ph.D., CFP®, and Thomas P. Langdon, J.D., LL.M., CFP®, CFA

Michael Finke, Ph.D., CFP®, is an associate professor and Ph.D. coordinator in the Department of Personal Financial Planning at Texas Tech University. His research interests include behavioral personal finance, retirement income planning, investor risk tolerance, and mutual fund performance. He is the editor of the Journal of Personal Finance. (

Thomas P. Langdon, J.D., LL.M., CFP®, CFA, is a professor of business law and director of the Sovereign Bank Center for Business Support at the Gabelli School of Business, Roger Williams University.

Executive Summary
Consumers who rely on the financial advice of experts are at an information disadvantage that may be exploited by advisers who are not required to make recommendations that are in the best interest of the customer.

An early legislative version of the 2010 Dodd-Frank Act would have eliminated the broker-dealer exception from the definition of investment adviser under the Advisers Act. If enacted, this change would have subjected brokers to a common-law fiduciary standard (like investment advisers), but was postponed to examine the consequences of this policy change.

It has been suggested that the imposition of a fiduciary standard on registered representatives would result in significant changes in how broker-dealers conduct business by limiting a representative’s ability to recommend commission investments, provide advice to middle-market clients, and offer a broad range of financial products.
We take advantage of differences in state broker-dealer common-law standards of care to test whether a relatively stricter fiduciary standard of care affects the ability to provide services to consumers. We find that the number of registered representatives doing business within a state as a percentage of total households does not vary significantly for states with stricter fiduciary standards.

A sample of advisers in states that have either a strict fiduciary standard or no fiduciary standard are asked whether they are constrained in their ability to recommend products or serve lower-wealth clients. We find no statistical differences between the two groups in the percentage of lower-income and high-wealth clients, the ability to provide a broad range of products including those that provide commission compensation, the ability to provide tailored advice, and the cost of compliance.
Financial advisers provide expert assistance selecting financial instruments for retail customers. Registered representatives of broker-dealers facilitate the sale of securities and often provide financial advice to clients who are less knowledgeable about the product. This imbalance of information has led to the imposition of a legal fiduciary standard when an informed agent is hired to make decisions on behalf of a less-informed client (Frankel 1983). In the absence of an informational imbalance between registered representatives (or brokers) and their customers, the primary service provided through broker-dealers is to sell retail financial products demanded by the customer. However, many broker-dealers have suggested through advertising and by referring to registered representatives with terms such as “financial planner” or “financial consultant” that their services include planning or consulting services that involve the provision of expert advice (Hung, Clancy, Dominitz, Talley, Berrebi, and Suvankulov 2008). Most consumers assume that advising services are provided by registered representatives of broker-dealers (Hung et al. 2008).

While consumers are generally unable to distinguish between investment advisers whose primary purpose is to provide investment advice and registered representatives whose advice is considered incidental to the sale of financial products, they are regulated by two different entities that apply different market conduct standards. Investment advisers are regulated by the Securities and Exchange Commission (SEC or Commission) under the Investment Advisers Act of 1940 (Advisers Act) as fiduciaries, and a fiduciary standard of care is applied to the advice given to their clients. Registered representatives of broker-dealers are regulated under the Securities Exchange Act of 1934 through the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. Registered representatives must meet a standard of suitability when providing information about financial products, and are not assumed to have a fiduciary responsibility toward customers.

The difference in regulation between investment advisers and brokers affects the market for financial advice. The sale of professional advisory services to a less-informed client involves significant potential agency costs that exist when the interests of the client and broker/adviser are not perfectly aligned (Jensen and Meckling 1976). These costs occur when the broker recommends products that benefit the broker to the disadvantage of the customer. Examples of agency costs include recommending products that have higher commissions or not taking the time to consider alternative financial strategies for a customer. It is possible that the application of a suitability standard to investment advice will lead to greater agency costs. A suitability constraint allows brokers to recommend products that are not necessarily in the best interest of the client but may be considered potentially suitable given the customer’s characteristics and needs. This latitude in product recommendation among registered representatives provides a greater opportunity to extract customer rents than would be possible under the constraints of a fiduciary standard (Cummings and Finke 2010). If the suitability standard provides greater opportunities to extract rents from clients, we would expect the broker-dealer industry to defend its ability to maintain this advantage by continuing the existing regulatory regime.

If, however, a fiduciary standard were applied to registered representatives whose sole purpose is to facilitate the sale of financial instruments within a competitive marketplace, the imposition of a fiduciary standard to these sales activities might have a negative impact on the ability of broker-dealers to provide a variety of financial products to consumers. Many consumers may demand products whose appropriate use is difficult for a registered representative to defend as being in the customer’s best interest. For example, there may be mutual funds that pay a commission to the broker that are less efficient than comparable mutual funds that pay no commission. The brokerage industry has argued that since moderate-income clients are less attractive to investment advisers, who are often compensated based on a percentage of assets under management, these clients often seek financial advice from registered representatives compensated through product commissions (Headley 2011). These less-wealthy clients may be less able to receive much-needed financial advice incidental to the sale of commission products if brokers incur increased liability under a fiduciary standard. The application of a standard of care that assumes a fiduciary relationship between registered representative and customer may constrain the ability to make product recommendations and limit the range of available financial products.

While the industry has suggested that fiduciary regulation will have an adverse impact on the industry, there are no existing empirical studies that examine the impact of a change in regulatory policy on the marketplace for financial advice. This study takes advantage of heterogeneity in broker-dealer regulation among states to test whether a relatively more strict application of a common-law fiduciary standard of care affects the number of registered representatives doing business within the state. We also conduct a survey to assess differences in perceived ability to provide financial products among states subject to stricter fiduciary standards. We find that the saturation of registered representatives within states does not vary significantly among states with different fiduciary regulation. When registered representatives in states that have a stricter fiduciary standard are asked whether they are constrained in their ability to recommend products, or whether they are unable to serve lower-wealth clients, we find no statistical difference between representatives from states that do and do not apply a common-law fiduciary standard.

On July 15, 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 913 of the Dodd-Frank Act required the SEC to conduct a study to evaluate, among other things, (1) the effectiveness of existing legal or regulatory standards of care (imposed by the Commission, a national securities association, and other federal or state authorities) for providing personalized investment advice and recommendations about securities to retail customers; and (2) whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for providing personalized investment advice about securities to retail customers that should be addressed by rule or statute. In one of the early legislative drafts, Dodd-Frank would have eliminated the broker-dealer exception from the definition of investment adviser under the Advisers Act, but the legislation as adopted included a compromise to conduct further study of the issue.

In January 2011, the SEC released its Study on Investment Advisers and Broker-Dealers (Staff of the U.S. Securities and Exchange Commission 2011). In its report, the SEC staff noted that “the regulatory regime that governs the provision of investment advice to retail investors is essential to assuring the integrity of that advice and to matching legal obligations with the expectations and needs of investors,” and found that investors are often confused by differing standards of care that apply to investment advisers and broker-dealers. The SEC study recommended the adoption of a uniform fiduciary standard for investment advisers and broker-dealers that provides:

The standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the consumer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.

The SEC study recommends that the Commission, in implementing a uniform fiduciary standard, should engage in rulemaking and provide interpretive guidance addressing the two major components of a uniform fiduciary standard: the duties of loyalty and care. When addressing the duty of loyalty, the report suggests that a uniform fiduciary standard will obligate both investment advisers and broker-dealers to eliminate or disclose conflicts of interest. The report notes, “[t]he Commission should consider whether rulemaking would be appropriate to prohibit certain conflicts, to require firms to mitigate conflicts through specific action, or to impose specific disclosure and consent requirements.” When it comes to duty of care, the study suggests that minimum baseline professional standards should be adopted that could include, for example, specifying what basis a broker-dealer or investment adviser should have in making a recommendation to an investor.

Traditional Standards of Care for Investment Advisers and Broker-Dealers
Investment Advisers. Section 202(a)(11) of the Advisers Act defines an “investment adviser” as:

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 as part of a regular business, issues or promulgates analyses or reports concerning securities.

Section 202(a)(11)(C) of the Advisers Act excludes from the definition of an investment adviser any broker or dealer that meets the following requirements: (1) the performance of investment advisory services is “solely incidental” to the conduct of its business as a broker-dealer, and (2) no “special compensation” is received for advisory services.

Investment advisers owe their clients a fiduciary duty of care (SEC v. Capital Gains Research Bureau Inc. 1963; Transamerica Mortgage Advisors Inc. 1979). The fiduciary standard that applies to investment advisers encompasses the adviser’s entire relationship with its clients and prospective clients (SEC v. Capital Gains Research Bureau Inc. 1963) and imposes a duty of loyalty and a duty of care.

The duty of loyalty requires a fiduciary to act in the best interests of the client, even if doing so may not be in the financial interests of the fiduciary.
Under the duty of loyalty, a fiduciary is required to disclose potential conflicts of interest so that the client is aware of those matters where the adviser, either consciously or unconsciously, might render advice that was not in the best interest of the client (SEC v. Capital Gains Research Bureau Inc. 1963).

The duty of care requires a fiduciary to “make a reasonable investigation to determine that it is not basing its recommendations on materially inaccurate or incomplete information” (U.S. Securities and Exchange Commission 2003). Investment advisers, as fiduciaries, must make suitable and reasonable investment advice to their clients based on the client’s financial situation and investment objectives.

Broker-Dealers. Traditionally, a broker-dealer has acted as an intermediary between a buyer and seller of securities. Unlike investment advisers, who are subject to a fiduciary standard, broker-dealers have traditionally been subject to a less stringent “suitability standard.” The suitability standard requires broker-dealers to provide suitable investments to customers, but does not require the broker-dealer to act in their best interest.

Broker-dealers do, however, have an obligation to deal fairly with customers. Courts have found that broker-dealers make an implicit representation to customers that they will be treated fairly in a manner that is consistent with the standards of the profession (Charles Hughes & Co. v. SEC 1943). Through various rulemaking initiatives, FINRA (and its predecessor organization, the National Association of Securities Dealers, or NASD) has helped define the duties implied by this fair dealing standard. Among these duties are requirements for broker-dealers to have a reasonable basis for recommendations that are made after considering the customer’s financial situation (a “suitability standard”) (NASD Rule 2310); engage in fair and balanced communications with the public (NASD Rule 2210(d)); provide timely and adequate confirmation of transactions; provide account statements (NASD Rule 2340); disclose conflicts of interest (NASD Rule 2720; NASD Rule 3040); receive fair compensation in agency and principal transactions (NASD Rule 2440; FINRA Rule 5110(c)); and give customers an opportunity to resolve disputes through arbitration.

Broker-dealers typically hire agents to provide their services directly to the public. Stockbrokers, for example, are considered agents of a broker-dealer. This agency relationship further complicates matters (and leads to confusion by the public about the varying standards that apply to investment advisers and broker-dealers) because an agent owes his or her primary duty to the principal (which, in this case, would be the broker-dealer). The duty of loyalty owed to the principal (broker-dealer) transcends any duty that the agent may have to a customer while acting in the role of an intermediary.

While broker-dealers are not subject to the fiduciary standard under federal law, state common law may impose a fiduciary standard on broker-dealers providing services within that state in addition to rules and regulations imposed by the federal government for transactions and services. Courts in four states have chosen to impose an unambiguous fiduciary standard on broker-dealers.

Study Objective
As a response to the regulatory problems and perceived fraud in financial markets that contributed to the recent financial crisis, Congress passed, and the president signed into law, the Dodd-Frank Act. Prior to the financial crisis, some private self-regulatory organizations, such as Certified Financial Planner Board of Standards Inc. (CFP Board) sought to distinguish designees from other providers of financial services by holding certificants to a fiduciary standard of care when dealing with clients. These events, along with a perception by lawmakers that higher standards should be applied to providers of financial products and advice, led Congress to call for the completion of a study by the SEC to determine whether it would make sense to impose a unified fiduciary duty of care on both investment advisers and broker-dealers when providing personalized investment advice.

While there has been some recent convergence of the regulatory duties performed by investment advisers and broker-dealers over time, particularly in the area of disclosure, there remain some differences in the scope of services provided by these professionals. Investment advisers have traditionally served higher-income/higher-net-worth clients and are often compensated on an assets under management basis. Depending upon the scope of the engagement, and whether they hold discretion, investment advisers may also hold a duty of care to clients to carefully monitor investment performance. Beginning in the late 1980s and early 1990s, the landscape for the delivery of investment advice began to shift when broker-dealers began to increasingly offer financial advice, relying on the “solely incidental” exemption in the Advisers Act or becoming dually registered as investment advisers to provide fee-based advisory services. The investment advice provided on the brokerage side, however, tends to be episodic and focused on specific products and transactions that are suitable for a given client. Broker-dealer agents are usually compensated on a commission basis, and traditionally do not owe customers an ongoing duty to monitor their client’s financial position. Broker-dealers have claimed to provide lower-cost advisory services, offset by transaction fees, for customers who do not wish to pay, or cannot afford to pay, the higher direct fees charged by investment advisers.

Due, in part, to the imposition of the suitability (as opposed to fiduciary) standard on broker-dealers, the current debate over the costs of providing advisory services to retail customers has focused on the potential economic effects of broker-dealers being held to the higher fiduciary standard of care. The brokerage industry argues that the imposition of a fiduciary standard will result in an increased risk of a fiduciary breach that would have the effect of increasing the compliance and liability costs of providing traditional broker-dealer services, and, consequently, may make those services too expensive for many lower- or middle-income clients (Headley 2011).

Further, while imposing a fiduciary standard of care may provide additional protections for brokerage customers, critics assert that the imposition of such a standard may result in some customers losing access to financial advice if the cost of that advice rises because of the imposition of the standard, or, alternatively, some customers may find that they will have to pay more for the investment advice they receive without experiencing a significant change in service resulting from the increased regulatory and liability costs imposed by regulation.

In order to test claims that the brokerage industry and its customers would be adversely affected by the imposition of a stricter fiduciary standard, this study surveyed registered representatives (brokers) of broker-dealers in states that impose a fiduciary duty on the provision of investment advice to retail investors, and in states that do not impose such a duty. The survey avoided brokers who are dually registered as investment adviser agents and who, in that capacity, provide fiduciary investment advice. If the presence of a fiduciary duty for brokers results in higher costs associated with that standard, it would suggest that states that impose the higher fiduciary standard have a lower saturation of brokers to households within that state. This would imply that there is an additional service cost attached to imposition of the fiduciary standard by reducing the number of service providers for lower- or middle-income customers.

Differentiating State Law
States were divided into three categories: (1) states that unambiguously apply a fiduciary standard to brokers in that state, (2) states that unambiguously apply no fiduciary standards to brokers, and (3) states where there is evidence of a limited fiduciary standard applied to brokers.

Four states have imposed an unambiguous fiduciary standard on broker-dealers (fiduciary states): California, Missouri, South Dakota, and South Carolina. California, Missouri, and South Dakota courts expressly impose a fiduciary duty on broker-dealers. California courts, for example, have held that a broker’s fiduciary duty requires that he or she act in the highest good faith toward the customer (Hobbs v. Bateman Eichler, Hill Richards Inc. 1985). Missouri courts have held that “stockbrokers owe customers a fiduciary duty. This fiduciary duty includes at least these obligations: to manage the account as directed by the customer’s needs and objectives, to inform of risks in particular investments, to refrain from self-dealing, to follow order instructions, to disclose any self-interest, to stay abreast of market changes, and to explain strategies” (State ex rel Paine Webber v. Voorhees 1995). South Dakota courts have held that securities brokers owe the same fiduciary duties to customers as those owed by real estate brokers, including a duty of utmost good faith, integrity, and loyalty, and a duty to act primarily for the benefit of another (Dismore v. Piper Jaffray Inc. 1999). While South Carolina courts have not expressly stated that broker-dealers must live up to a fiduciary standard, the courts have imposed duties commensurate with those required when a fiduciary duty applies, including a duty to refrain from acting contrary to a customer’s best interest, avoid fraud, and communicate information to the customer that would be in the customer’s advantage (Cowburn v. Leventis 2005). South Carolina courts have clearly imposed a duty of care commensurate with the duty required by a fiduciary that exceeds the suitability standard that applies under federal law to broker-dealers.

States that do not impose a fiduciary standard on broker-dealers are Arizona, Arkansas, Colorado, Hawaii, Massachusetts, Minnesota, Mississippi, Montana, New York, North Carolina, North Dakota, Oregon, Washington, and Wisconsin. Courts in Arkansas, Hawaii, Massachusetts, Montana, and Washington have expressly stated that, under state law, a fiduciary duty does not exist between a client and a broker-dealer. Courts in Arizona, Colorado, Mississippi, New York, North Carolina, North Dakota, and Oregon have all concluded that broker-dealers do not owe a fiduciary duty to holders of non-discretionary accounts. In Minnesota and Wisconsin, state law provides that a broker does not owe a fiduciary duty to customers absent a special agreement between the parties.

The remaining states (Alabama, Alaska, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, Ohio, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, and Wyoming) impose either a limited fiduciary standard, or the courts have interpreted state law to impose duties that appear to be fiduciary in nature. In this study, these states are referred to as quasi-fiduciary states. Quasi-fiduciary states impose standards that exceed the suitability standard set forth under FINRA rules, but do not expressly classify broker-dealers as fiduciaries. The duties imposed, and the manner in which they are imposed, vary among these states. In Alaska, for example, courts have found that fiduciary duties arise “when one imposes a special confidence in another, so that the latter, in equity and good conscience, is bound to act in good faith and with due regard to the interests of the one imposing the confidence” (Enders v. Parker 2003). While the Enders court did not specifically consider whether a fiduciary duty is imposed on a broker-dealer, the court’s standard for imposing a fiduciary duty could reasonably be interpreted to create a duty for a broker-dealer in some circumstances.

Other states, such as Connecticut, refrain from imposing an express fiduciary duty, but did find an agency relationship between a broker and a client that required the broker to exercise “reasonable skill, care, and diligence” (Precision Mechanical v. T.J.P Fund 2003). Connecticut’s approach is intriguing in that an agency relationship exists with both the registered representative’s employer (the broker-dealer) and with the customer. Connecticut law, as currently expressed, cannot impose a fiduciary duty on registered representatives due to the inherent conflict of interest created by the state’s imposition of a customer-representative agency relationship, which suggests that the registered representative serves two masters, not one. Iowa courts have not traditionally imposed a fiduciary duty on a broker-client relationship, but do so when certain circumstances exist, such as when the client lacks prior investment experience, the advice offered by the broker-dealer is significant, the client relies (to his or her detriment) on the advice provided by the broker-dealer, and the broker-dealer was aware that the client had not read any literature concerning the subject (McCracken v. Edward D. Jones & Co. 1989).

States that impose a limited fiduciary duty include Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Ohio, Pennsylvania, Tennessee, and Texas. Almost all of these states impose a standard higher than the suitability standard imposed by FINRA for non-discretionary accounts. Louisiana does not expressly impose a standard of conduct higher than the suitability standard, but does require a court to consider a variety of circumstances when determining whether a higher standard should exist. The items that Louisiana courts must consider include the relationship between the broker-dealer and client, the nature of the account, and the sophistication of the customer (Beckstrom v. Parnell 1998).

Criticisms of Imposing a Fiduciary Standard
Differing client characteristics have resulted in different business models used by investment advisers and broker-dealers to deliver cost-effective advice to their clients. Imposing a uniform fiduciary standard on both investment advisers and broker-dealers may have unintended consequences.

Some in the brokerage industry have argued that the imposition of fiduciary regulation will lead to reduced consumer access to financial advice, particularly among middle-class households that may not have access to investment advisers. Many broker-dealers provide financial services other than the sale of securities to their clients, including insurance products and brokerage services to qualified retirement plans. The president of the National Association of Insurance and Financial Advisors (NAIFA) testified before the House Committee on Financial Services that broker-dealers are typically subject to both additional state and federal regulation for these services, and these regulations generally provide constraints on behaviors that may be considered abusive (Headley 2011).

Imposing the higher fiduciary standard that currently applies to investment advisers may increase the compliance costs of broker-dealers. A study conducted by NAIFA in 2010 found that an unintended consequence of imposing a uniform fiduciary standard would be to “negatively impact product access, product choice, and affordability of customer services for those customers who are in most need of these services” (Headley 2011). Specifically, the study indicated that imposition of a uniform fiduciary standard may “create the potential for market disruption and reduced choices for investors when it comes to who they work with and how they pay for services” (National Association of Insurance and Financial Advisors (in Partnership with LIMRA) 2010). The NAIFA study indicated that most of its members are “concerned that the additional regulatory requirements and potential legal implications of a fiduciary standard could significantly increase their compliance costs.” (Headley 2011; National Association of Insurance and Financial Advisors (in Partnership with LIMRA) 2010). In the NAIFA study, 65 percent of NAIFA members indicated that if compliance costs rose by 15 percent, they would limit their practice to affluent clients only (31 percent of those surveyed), would not offer securities to their clients (20 percent of those surveyed), or would increase fees for their clients (14 percent of those surveyed) (Headley 2011).

An SEC staff study indicated that investors “generally were satisfied with their financial professionals” (Staff of the U.S. Securities and Exchange Commission 2011), but that customers are confused with the varying standards that apply to different types of financial advisers and, based on this conclusion, recommended the adoption of a uniform fiduciary standard. While the industry raised concerns that imposing a uniform standard that increases compliance costs for broker-dealers may result in limited access to suitable investment advice for middle-income clients, the SEC staff noted the possibility that the change in standards might result in reduced administrative and compliance costs.

Opponents of the fiduciary standard are often criticized for having no data to substantiate claims about increased costs that may arise upon imposition of a uniform fiduciary standard (Consumer Federation of America 2011). In particular, proponents of a uniform fiduciary standard assert that “claims about increased liability costs associated with a fiduciary duty are … unsupported and ignore the legal environment in which brokers currently operate” because “the SEC proposal makes clear that it intends to provide extensive guidance to assist brokers in implementing the fiduciary standard” (Consumer Federation of America 2011). Proponents of a uniform standard claim that the SEC proposal “would not require brokers to charge fees,” and that the proposal preserves “the ability of brokers to offer transaction-based advice … [while] at the same time … rais[ing] the standard that applies to those transaction-based recommendations” (Consumer Federation of America 2011).

Imposing a fiduciary standard on transaction-based advice may increase the potential for legal liability of the registered representative, requiring the broker to be compensated for that additional risk. NAIFA members have expressed concern that the increased duties they owe transactional clients under a fiduciary standard may result in potential legal implications that increase their cost of doing business (National Association of Insurance and Financial Advisors (in Partnership with LIMRA) 2010).

In order to estimate how the imposition of a stricter universal fiduciary standard will affect the provision of financial advice within the brokerage industry, we obtained the names and addresses of 544,000 registered representatives active in November 2011, and sorted them into categories based on the application of a fiduciary standard. There are four states that apply a strict fiduciary standard, 14 that apply a limited fiduciary standard, and 32 states (and the District of Columbia) that apply no fiduciary standard.

Our objectives were to assess perceived differences in business conduct among registered representatives sorted by fiduciary regulation and to assess the market saturation (representatives as a proportion of total households) of registered representatives among these states. To assess whether registered representatives’ business conduct differs in states that apply a strict fiduciary standard, we developed a survey among a sample of registered representatives in states that apply no fiduciary standard and states that provide a strict fiduciary standard. The survey was conducted in November and December 2011. Participants were drawn randomly from both categories of states and were asked 12 questions. These questions were based on brokerage industry statements and testimony before Congress suggesting that a stricter fiduciary standard will result in differences in ability to serve moderate-wealth customers, offer a variety of products, and provide product recommendations that are in the best interest of their customers—as well as representatives potentially experiencing a greater compliance burden.

Broker-dealers in fiduciary and non-fiduciary states were asked the following questions:

Are you a registered investment adviser? (If so, survey is over.)
What percentage of your clients have incomes of less than $75,000?
What percentage has investable assets of over $750,000?
Are you able to serve the financial needs of low- to moderate-wealth clients?
Do your state’s security regulations limit your ability to recommend a broad range of financial products?
Do you offer your clients a choice of financial products that meet their financial needs and objectives?
Do you provide advice tailored to the specific needs of your clients?
Do you feel that less-affluent clients avoid obtaining your services due to cost?
Are you able to recommend products that provide a commission?
How significant is the cost of compliance?
Do you feel that you make product recommendations that are in the best interest of your client?
Among the following options, which do you consider to be the most important single factor in pricing your investment advice to clients: competition in the marketplace, firm brand, personal qualifications, legal and compliance burden, or other?
In order to provide insight into whether the imposition of stricter fiduciary standards leads to reduced supply, we compared the saturation of registered representatives within the total population of states sorted into the three fiduciary categories (strict, limited, and no fiduciary standard). Only registered representatives who have completed Series 6 or Series 7 examinations were included in the analysis.1 We provide both a descriptive comparison of saturation among states and a multivariate analysis that includes dummy variables for strict fiduciary and non-fiduciary standards with limited fiduciary as the reference category. Because of the small sample size (50 states and the District of Columbia), we include one control variable to account for the log of mean household income within the state.

New York housed five of the 17 largest broker-dealer firms in the United States in 2011 (InvestmentNews 2012). The saturation of brokers within New York is more than three times the national average and 44 percent higher than the second largest state (Connecticut). Because New York is the traditional center of the brokerage industry and may include a large number of registered representatives not primarily engaged in selling securities directly to individual clients, we include descriptive statistics with and without New York state and include an additional multivariate analysis with a dummy variable to control for the New York effect.

We also estimate the possibility that representatives living within fiduciary states will see less benefit to regulation under the Securities Exchange Act, and subsequently register as investment advisers through the Securities and Exchange Commission. We collect registered investment adviser (RIA) assets by state using publicly available data through SEC filings and compute mean assets per household by state fiduciary status and run a multivariate analysis using the natural log of RIA assets per household as the dependent variable.

Descriptive statistics summarizing the responses received from a random survey of 207 registered representatives in the four strict fiduciary states and the 14 non-fiduciary states are presented in Table 1. The percentage of clients who have an income of less than $75,000 is statistically equal between both groups, and there is no statistically significant difference in either the percentage of high-wealth clients or in the percentage of brokers who believe they serve the needs of low- and moderate-wealth clients. Nearly all respondents believe they are able to provide products and advice that meet the needs of customers. The percentage who respond that they are able to recommend commission products is 88.5 percent in strict fiduciary states and 88.2 percent in non-fiduciary states. The largest percentage point difference among any of the questions is whether the cost of compliance is significant. Nearly 71 percent of respondents in fiduciary states felt the costs were significant compared to nearly 62 percent in non-fiduciary states. This difference, and that of all other questions in the survey, was not statistically significant.

Mean rates of broker saturation calculated as the number of registered representatives divided by the number of households within the state are presented in Table 2. There is a wide range in saturation rates among states, from a low of 1.31 per 1,000 households in New Mexico to a high of 13.41 in New York. Average saturation rates are lowest among states with a limited fiduciary standard (3.81) and highest among states with no fiduciary standard (6.33). However, the saturation rates were nearly identical among fiduciary categories when New York is excluded from the non-fiduciary states. Saturation rates are 3.96 for strict fiduciary states, 3.81 for limited fiduciary, and 4.04 for non-fiduciary states.

We then take Missouri, an average-size state with a fiduciary standard, and compare it with other states that have a population between 2 million and 3 million households (Table 3). The broker saturation rate in Missouri (2.65) is equal to that of Tennessee (a limited fiduciary state) and comparable to non-fiduciary states with similar income levels (Arizona is 3.12, Washington is 2.54). Other states with higher incomes have higher saturation rates.

In order to control for state saturation differences that may be caused by differences in income within states, we run a regression modeling individual state saturation rate as a function of fiduciary status and log household income. Results in Table 4 show that there is no statistical difference in saturation rates among fiduciary and non-fiduciary states relative to the reference group of limited fiduciary states. When a dummy variable is included to account for the elevated saturation within New York, the coefficient suggests that the saturation rate in New York is 8.3 points higher than the predicted rate. Fiduciary status variables remain statistically insignificant. There is no evidence that the average amount of assets managed by investment advisers is greater in states with either weaker or stronger fiduciary standards, which suggests that representatives within stricter fiduciary states (or representatives with greater assets under management) are no more likely to switch regulatory regimes.

This study explores the regulation of registered representatives of broker-dealers in order to estimate whether the proposed application of a universal fiduciary standard will have a significant impact on the financial adviser industry. We take advantage of differences in the application of a fiduciary standard to representatives among states in order to test whether representatives already subject to a stricter fiduciary requirement are affected by the higher standard. We conducted a survey of 207 representatives within the four states that apply a strict fiduciary standard and the 14 states that apply no fiduciary standard and find no statistical differences between the two groups in the percentage of lower-income and high-wealth clients, the ability to provide a broad range of products including those that provide commission compensation, the ability to provide tailored advice, and the cost of compliance.

We then compare the ratio of registered representatives to total households among states within the three fiduciary regimes. When New York (which houses a disproportionate proportion of broker-dealer firms) is excluded from the non-fiduciary states, the saturation rate is almost identical between fiduciary, limited fiduciary, and non-fiduciary states. A comparison of a moderate-size state with strict fiduciary regulation (Missouri) with non-fiduciary and limited-fiduciary states of a similar population suggests a strong similarity among states with similar incomes.

A multivariate analysis of broker saturation that controls for fiduciary and non-fiduciary regulation as well as state mean income yields no significant fiduciary effect, even with New York included as a non-fiduciary state. The addition of a dummy variable to account for the New York effect suggests that New York’s saturation rate is inflated by 8.3 representatives per thousand households.

Empirical results provide no evidence that the broker-dealer industry is affected significantly by the imposition of a stricter legal fiduciary standard on the conduct of registered representatives. The opposition of the industry to the application of stricter regulation suggests that agency costs that exist when brokers are regulated according to suitability are significant. Imposition of a universal fiduciary standard among financial advisers may result in a net welfare gain to society, and in particular to consumers who are ill-equipped to reduce agency costs on their own by more closely monitoring an adviser with superior information, although this will likely occur at the expense of the broker-dealer industry. These results provide evidence that the industry is likely to operate after the imposition of fiduciary regulation in much the same way it did prior to the proposed change in market conduct standards that currently exist for brokers.

This constraint excludes less than 5 percent of the original sample and has no impact on the empirical results.
Beckstrom v. Parnell, 730 So2d 932 (Louisiana Appellate Court 1998).

Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), cert denied, 321 U.S. 786 (1944) (U.S. Court of Appeals for the Second Circuit 1943).

Consumer Federation of America. 2011. Response to Arguments About Fiduciary Duty ‘Unintended Consequences.’

Cowburn v. Leventis, CCH Par 75,542 (South Carolina Court of Appeals May 16, 2005).

Cummings, B., and M. Finke. 2010. “The Economics of Fiduciary Investment Advice.” Available at SSRN:

Dismore v. Piper Jaffray Inc., 593 N.W.2d 41 (S.D. 1999).

Enders v. Parker, 66 P.3d 11 (Alaska 2003).

Frankel, T. 1983. “Fiduciary Law.” 71 California Law Review 795 (May).

Headley, T. 2011. “Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight.” Testimony offered to the House Committee on Financial Services, Subcommittee on Capital Markets and Government Sponsored Enterprises (Sept. 13).

Hobbs v. Bateman Eichler, Hill Richards Inc., 165 Cal. App. 3d 174, 210 Cal. Rptr. 387 (California Court of Appeals 1985).

Hung, A. A., N. Clancy, J. Dominitz, E. Talley, C. Berrebi, and F. Suvankulov. 2008. Investor and Industry Perspectives on Investment Advisers and Broker-Dealers. Santa Monica, California: RAND Corporation.

InvestmentNews. Broker-Dealer Rankings. ... a-rankings.

Jensen, M., and W. Meckling. 1976. “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” Journal of Financial Economics 3, 4: 305–360.

McCracken v. Edward D. Jones & Co., 445 N.W.2d 375 (Iowa Appellate Court 1989).

National Association of Insurance and Financial Advisors (in Partnership with LIMRA). 2010. “Facts at a Glance: Results from a LIMRA Survey of NAIFA Members.”

Precision Mechanical v. T.J.PFund, CA 90-0416692, 2003 Ct. Sup. 14518 (Connecticut Superior Court December 22, 2003).

SEC v. Capital Gains Research Bureau Inc., 375 U.S. 180 (U.S. Supreme Court 1963).

Staff of the U.S. Securities and Exchange Commission. 2011. Study on Investment Advisers and Broker-Dealers (January).

State ex rel Paine Webber v. Voorhees, 891 S.W.2d 126 (Mo. 1995) en banc (1995).

Transamerica Mortgage Advisors Inc., 444 U.S. 11 (U.S. Supreme Court 1979).

U.S. Securities and Exchange Commission. 2003. Proxy Voting by Investment Advisers, Investment Advisers Act Release No. 2106 (Jan. 31).

Acknowledgements: This research was made possible by donations from the Roger and Brenda Gibson Family Foundation, fi360, the Committee for the Fiduciary Standard, and the Financial Planning Association. ... yStandard/

(advocate comments: I love it when the industry says things like this "The brokerage industry argues that the imposition of a fiduciary standard will result in an increased risk of a fiduciary breach that would have the effect of increasing the compliance and liability costs of providing traditional broker-dealer services, and, consequently, may make those services too expensive for many lower- or middle-income clients (Headley 2011)." Found inside this study. Another way of reading this statement is that "we need to harm or abuse our clients a little bit in order to make enough money to justify dealing with lower value clients.......and if we could not harm or abuse them in this manner......we would not be able to afford to offer them our "services'......." (Sorry for any sarcasm)

See also: ... andard.pdf ... id=2051382 ... sp=sharing (conflicts harm consumers)

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

Postby admin » Fri Oct 18, 2013 3:52 am

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“It’s a crime what’s legal on Wall Street,” is a phrase we used to invoke frequently during my years at Forbes. The topic came up so often because in finance so many practices that are just plain wrong persist for years, and decades, directly under the noses of the financial cops.

Then on occasion, when nobody’s expecting it, something snaps. Too many people lose money. An ambitious government official goes on the rampage. (Note that the terms “attorney general” and “aspiring governor” are often synonymous.) All of a sudden, practices that have been so wrong in so many ways forever suddenly become unacceptable.

That’s what happened with mutual fund market timing and late trading a decade ago. For years, Securities and Exchange Commission officials acknowledged that the once-a-day setting of prices made international mutual funds an easy mark for those who gamed the system at the expense of small, long-term investors. Yet SEC officials did nothing but make speeches. Then along came Eliot Spitzer, who fingered the practices as scams and shut them down in a sweep that even led to a few criminal convictions.

Over the past few years, Wall Street’s collapse has led to a crackdown that’s put more wrongful practices off limits. Banks, for example, face a much tougher time selling worthless credit card “payment protection” plans, can no longer reorder debit card transactions to stick customers with excessive overdraft fees or sue delinquent credit card customers en masse with little or no evidence to support their demands.

Companies that service mortgages can no longer connive with property insurers to foist exorbitantly priced “force-placed” policies on struggling homeowners who’ve let their standard coverage lapse. Likewise, the securities markets are getting more hostile for high-frequency traders, who’ve counted on receiving market-moving news before the rest of the public to profit at its expense.

Good stuff all, but Wall Street remains place where a lot of very bad behavior continues to take place out in the open. Here are some of what I regard as the most egregious examples.

Financial Advisor Chicanery: Imagine a two-tiered health care system in which some doctors were legally obligated to do what’s right for their patients and others, like snake oil salesmen of yore, could recommend whatever treatments made them the most money, as long as they didn’t kill patients outright. Now imagine that the shysters did all they could to blend in with the real doctors. That’s effectively the type of system we have today among the people Americans count on to tell them how to invest their life’s savings. Registered investment advisors must, by law, put clients' interests first. Many thousands of other “advisors” at places like Morgan Stanley, Merrill Lynch and smaller shops are held to a much lower “suitability” standard. In essence, even though these people often refer to themselves as “financial advisors” or by some other comfort-inducing title, they’re really glorified salesmen. Some do a great job serving their clients. Others don’t. It’s up them. Under the law, as long as they avoid putting an 85 year-old widow into an exotic derivative with a 20 year lockup, they’re bulletproof. Few clients know this fiduciary-suitability gap exists. The suitability crowd has worked tirelessly to keep the standard low and the distinctions murky. The cost to the public is incalculable but huge.

Pension Official Payola: Across the country public officials have been funneling growing slices of their trillions of dollars of public pension assets into hedge funds and private equity partnerships that boast high risks and high costs but not necessarily high returns. It just so happens that their fund managers often show their appreciation by investing in the political success of the public officials who favor them. I wrote about one such egregious example in North Carolina a half-dozen years ago. Matt Taibbi took a pass at the story in a Sept. 26 Rolling Stone story tilted “Looting the Pension Funds.” The muni bond market is hardly a symbol of propriety. But at least there underwriters have been banned since 1994 from contributing to public officials’ campaigns. SEC chairman Arthur Levitt tried to impose a similar ban for pension managers in 1999 but lost out to the lobbyists. Now would be a good time for Mary Jo White to try again.

Chairman = CEO Absurdity: A corporate board of directors is legally obligated to represent shareholders. A chief executive is the leader of the hired help. But in over half of U.S. corporations, the chairman and CEO are one in the same. The practice has many fervent defenders, like former JPMorgan Chase (JPM) chairman and CEO William Harrison, who argue that it creates greater cohesion. But it also creates an unjustifiable conflict of interest in which investors are the victims. Is there a chairman in the country who’s going to fire himself as CEO, no matter how dismal his performance? Nuf said.

Management Buyout Mess: The top managers of public companies have a fiduciary duty to maximize shareholder value. Yet sometimes those occupying the boardroom and C-suite get it in their heads that they’d like to buy the company they’re managing. In such cases, the lower the share price falls, the bigger their potential gains. So their fiduciary duty and personal financial interests are diametrically opposed. The answer to this one is simple: ban officers and directors of public companies and their families from participating in management buyouts with no ifs, ands or buts. If you want to buy your employer, quit first and do it from the outside.

SRO Conflict: Think of foxes guarding a henhouse. That’s essentially the franchise the New York Stock Exchange and Nasdaq enjoy as “self-regulatory organizations” with the authority to write market rules and supervise trading activity, along with Wall Street's self-funded watchdog, the Financial Industry Regulatory Authority. Even back in the days when exchanges were nominally not-for-profit, the SROs failed to prevent a steady stream of scandals, including some that indicated the very core of the exchanges’ trading operations were rotten. That included price fixing by Nasdaq market makers and improper trading by New York Stock Exchange floor brokers. Now that the exchanges are themselves publicly listed, the SRO structure is even more suspect and poses new perils. Following the debacle that was the initial public offering of Facebook, Nasdaq sought to invoke its SRO status as form of legal immunity from traders who lost money at the hands of its technological mistakes. Bottom line: Cops and robbers should never live under the same roof. That’s a truism new SEC boss Mary Jo White may be taking to heart.

‘Fairness’ Opinion Unfairness: When corporate boards are trying to convince the world that a merger or acquisition is “fair” to shareholders, they turn to their investment bankers to render an opinion. You might as well ask a barber if you need a haircut. The problem with fairness opinions is twofold: the investment bank rendering the opinion typically has a financial interest in seeing the deal get done; and the directors seeking it may also be looking forward to a change-in-control or other payday that investors aren’t. Bottom line, fairness opinions are a bogus exercise in CYA. Tear down the facade and leave boards to face the legal ramifications of their actions sans the fig leaf.

Revolving Door Debacle: It’s hard to swing a cat without hitting a financier/regulator who hasn’t profited from the incestuous ties between Wall Street and Washington. Treasury Secretary Jack Lew hails from Citigroup. Former SEC boss Mary Schapiro moved to uber-connected advisory firm Promontory Financial. Her SEC successor, Mary Jo White, has made a round trip from government to Wall Street and back again. Sometimes such people do a great job of swapping sides. But in aggregate the result is a blurring of the line between regulators and the regulated. Sheila Bair, the former head of the Federal Deposit Insurance Corp., put it best: "The capture, a lot of people say, is bipartisan. And when I say capture, I'm talking about cognitive capture. It's not so much about corruption. It's just listening too much to large financial institutions and the people who represent them and not enough to the people out on Main Street who want this fixed." In a free country there’s no way, thankfully, to prevent people from job-hopping. Prohibitions on lobbying former government employers are of some value. But what would really help is for the revolving door to swing less between Wall Street and Washington. Imagine the difference if the SEC and other regulators put honest-to-goodness consumer advocates in positions of power to balance out all those Wall Streeters. ... all-street
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Wed Oct 09, 2013 11:57 pm

In the first five minutes of this audio-presentation, you will get a further glimpse into the "advisor" bait and switch, whereby NON-licensed "advisors" get to pretend to investment consumers to have the same skill and duty of care as do licensed "advisors". Imagine if there were a hidden category of "doctors" who were mere pharmaceutical product salespeople in the disguise of a real doctor and you will get the picture. Self regulation is decriminalization.

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Washington Policy Update: Fiduciary Duty

James Allen, CFA, head of Americas capital markets policy at CFA Institute, reports on Washington, DC outreach activities regarding the SEC’s proposals on a single fiduciary duty, Congress’ focus on housing finance through year-end, and possible repairs to the Dodd-Frank Act.

Click on the link below for five minutes of this audio-presentation: ... sode_2.mp3

(advocate comment: The CFA is about the highest standard of educational designation that investment professionals can obtain. It is very likely to NOT find simple salespersons holding the CFA designation. I myself did not attain it, but reached CFP, CIM, FCSI. In my opinion CFP is the lowest rung, and most likely to signify a simple sales-person role. I discovered the podcast while surfing through podcasts by the CFA Institute. At the risk of flattering them too much, I find speakers to CFA conferences etc to be the very best professionals in the world. Investors would be highly served if they listened in to podcasts and speaking events by CFA. I have yet to hear one with a predatory-sales approach. As a recovering broker I am hypersensitive to sales pitches thinly disguised as professional advice. I am grateful to the CFA institute for not yet having sold out to this greed game. Did I mention that I am not a CFA?:)
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Tue Oct 01, 2013 8:14 pm ... fiduciary/

"Under current laws advisors needn’t give advice in the best interests of their client"

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The rise of ‘fiduciary society’

Society faces increasingly complex governance challenges. We’ve over-promised and it is no longer clear that growth models will bridge the gaps. While there is a growing recognition that we need to take a longer-term view, the incentives for myopic leadership (and action) remain acute.

Our common law system — where courts respond to specific fact situations — may play a critical role in breaking this log-jam. One avenue is likely to be through the concept of fiduciary duty – the legal obligation to act in the best interests of others. Our Supreme Court is at the “leading edge” in developing a coherent view of the nature of fiduciary relationships and their consequences, largely through its recognition of a new class of fiduciary relationship between the crown and aboriginal peoples. The logic is permeating more broadly.

The Court has focused on the high degree of specialization and interdependence in society. We increasingly rely on the services and expertise of strangers. This rise of “fiduciary society” is a classic non zero-sum game where we can all benefit but, if trust is eroded, the game fails (and everyone loses). Hence it is that values of trust and loyalty, shaped by “reasonable expectations,” has come to form the basis for the Court’s broad standards.

For example, in BCE the Court reviewed a claim by bondholders who alleged their interests had not been adequately considered by the directors of BCE in the context of a change-of-control transaction. While upholding the Board’s decision, the Court noted that there is no “principle that one set of interests … should prevail over another set of interests. Everything depends on the particular situation …” and whether the Board treated stakeholders “equitably and fairly”, in accordance with their “reasonable expectations.” By focusing on societal expectations, the Court effectively imposed public responsibilities on directors.

Under current laws advisors needn’t give advice in the best interests of their client

One can anticipate similar responses to conduct in financial services. Consider Thomson Reuters, which pays the University of Michigan about $1-million a year for a monthly “consumer confidence” figure (a market-moving measure of opinion about the economy) and charges customers for access to the data five minutes before it is posted on the web. It recently came to light that it also charged extra to a group of customers who receive the information two seconds (plus or minus 500 milliseconds) earlier in a format designed to facilitate algorithmic trading. In the world of high-speed trading 500 milliseconds is ample time to trade ahead of the soon-to-be public news. While, historically, private entities have been free to exploit their work product as they see fit, the apparent lack of disclosure of these arrangements, coupled with the fact that the data was being resold from a public college, have raised questions about fairness. The SEC is investigating.

Stock exchanges generate revenues by charging “rent” to high frequency traders, who co-locate their servers immediately adjacent to those of the exchange in order to gain a similar trading advantage of milliseconds. Such activity now accounts for the majority of trading volume on the world’s major equity markets. It wouldn’t be a stretch for a court (or regulator) – feeling such commercial behaviour to be “unfair” and corrosive of public confidence – to impose public responsibilities on the exchanges (most of which were originally conceived as public institutions).

Under current Canadian securities laws advisors must recommend suitable investments but needn’t give advice that is in the best interests of their client. For example, they can recommend a product that pays a higher commission than one more suitable for the client. It is not surprising that the Canadian Securities Administrators have issued a consultation paper exploring the merits of introducing a “best interest” (i.e., fiduciary) standard for those advising retail clients. Or that regulators in the U.K. and Australia have gone one step further by completely severing the link between investment advice and sales-based compensation, so that only unconflicted advisors are permitted to offer advice (on a transparent fee-for-service basis). The stakes are high – the compounding effect of higher commissions for a typical Canadian family can erode their retirement income savings by over 20%.

Public pension plan trustees face what has become one of our most critical governance challenges – that of achieving intergenerational equity. They are already subject to a legal duty of impartiality. The outcomes of their decisions must reflect due regard for the best interest of future (as well as current) beneficiaries. Meeting the challenge of fair treatment assumes a level of proficiency with respect to long-term value creation and risk mitigation. Arguably, it imposes obligations to demonstrate respect for social norms, to give beneficiaries (or, in the case of future beneficiaries, perhaps their proxy) a voice in decisions that affect their interests and to think and act strategically and collectively. To date, such standards of conduct haven’t been tested in the courts.

Investing is a means to ensure our future well-being. This requires a broader consideration of systemic effects – how investment can create better markets tomorrow, rather than simply “beating” the market today. Competitive forces — rewarding those who take advantage of informational asymmetries and succumb to a self-destructive cycle of short-termism— have generated unhealthy outcomes for the system. It is only a matter of time before our courts (or regulators) will find opportunities to better define and protect the public interest. This is likely to lead to the imposition of public stewardship responsibilities throughout the financial services supply chain.

Edward J. Waitzer is Professor, Osgoode Hall Law School and Schulich School of Business and Partner, Stikeman Elliott LLP. ... fiduciary/
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Tue Oct 01, 2013 3:56 pm ... l-advisor/

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6 Pointed Questions To Ask Before Hiring A Financial Advisor
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Kenneth G. Winans

This is a guest post by Kenneth G. Winans, a veteran investment manager based in Novato, Calif.

Despite what you might read elsewhere about managing your own finances, it is often a good idea to get some help. It’s for roughly the same reason you hire an attorney. You don’t have the skills to handle a divorce or a property dispute.

First, though, you need to understand a little bit about the mind-bending terminology Wall Street uses to describe those who want to help you enlarge your nest egg. This basically comes down to two words: advisor and broker.

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An advisor is a professional you hire to pick stocks, bonds, real estate investment trusts and other investments for you. Advisors are “fiduciaries,” which means they’re legally obliged to act in your best interest. They usually charge a flat salary or fee or receive a cut (1 percent is typical) of the assets under management. Because of the compensation structure, advisors are seen as having fewer conflicts of interest than brokers.

Broker is short for stockbroker—someone working for an investment firm whose job it is to persuade a client to buy or sell stocks, bonds, mutual funds, ETFs and other financial products. Brokers are salesmen, and they’re paid on commission: no transaction, no pay. So there’s considerable incentive for them to gin up business. And they’re not fiduciaries. The broker’s standard is “suitability.” That means the investment should be appropriate for a client, but doesn’t have to be the best or even conflict-free.

“In their ads, the brokerages sell themselves again and again as providing comprehensive financial planning,” says Scott Ilgenfritz, a Florida securities lawyer and past president of the Public Investors Arbitration Bar Association, an advocacy group that helps public investors in securities arbitrations. “They send the message: You’ll be safe with us—right up until you have the audacity to complain. Suddenly, it’s: `We’re not advisors, we’re just order takers.’”

The distinction between advisor and broker used to be reasonably clear. But traditional brokerage revenues turned out to be vulnerable to competitive pressure from discount investment firms, no-load mutual funds and exchange-traded funds, and the advent of the Internet. And in the 1990s, the major brokerages stopped calling their salespeople “brokers” and started calling them—surprise!—“advisors.”

This triggered a decade-and-a-half-long fight, brought by traditional investment advisors who argued these renamed brokers were deceiving the public into thinking they were money-managing fiduciaries. The brokerages responded that they were better policed, by the Financial Industry Regulatory Agency (FINRA), than traditional advisors, who, depending on size, were regulated by either the U.S. Securities and Exchange Commission or state securities departments.

At first, the SEC passed “rule 202,” which sided with brokerages, allowing brokers earning commissions to also call themselves financial advisors and charge advisor-type fees in exchange for guidance without registering with the SEC as investment advisors or living up to tougher fiduciary standards. But advisors sued and, in 2007, won. The rule had “created an unlevel playing field,” says Duane Thompson, a senior policy analyst with Fi360, a fiduciary-standards advocacy and education firm based in Bridgeville, Pa.

Alas, the SEC still offered brokerages exemptions that allowed them to call their brokers “advisors” and charge fees based on the size of a client’s brokerage accounts, as long as they met some more stringent disclosure standards.

The Obama administration has called for changes to SEC rules that would force anyone called an advisor to adhere to the tougher fiduciary standard. But with the Dodd-Frank Act in 2010, Congress left the decision up to the SEC. The SEC has studied the issue and asked for public comment, but hasn’t ruled on the matter since the comment period ended in early June. And last month, when President Obama pressed regulators to tighten financial-industry rules to avoid a repeat of the 2008 economic crisis, he didn’t deal specifically with the advisor-broker controversy.

Until the SEC makes its next move, who is stuck in the middle of all this? You, especially if you don’t want to overpay for good investment guidance.

I happen to be a long-time financial advisor who started his career working for big brokerages. Here’s my take on this:

If you take full responsibility for your investments and really just need somebody to carry out your orders and handle basic administrative tasks, then a salesman—a broker or broker-type advisor—is probably all you need. FINRA provides some good tools to help you pick one. To check out the background of any broker, including complaints and disciplinary matters, go here.

If that’s not you, you need a real investment advisor. To be sure, not every genuine investment advisor is an angel. In 2006, the SEC ordered Bernie Madoff to register as a fiduciary, but that didn’t help his investors when his Ponzi scheme collapsed in late 2008. I’ve also seen registered investment advisors who charmed their clients, opened brokerage accounts, then stuffed them full of mutual funds and ETFs using canned asset-allocation programs requiring little effort on the part of the advisor. The client ended up paying not only the advisor’s quarterly fee but also a second level of fees charged by the mutual funds. There was very little ongoing advising and lots of portfolio neglect.

So I say ignore the word advisor altogether—along with other terms like financial planner, wealth manager, investment counselor and portfolio manager. And don’t be overly trusting of the alphabet soup of credentials that follows them, either: CFA, CMT, CFP, CFC, WMI just to name a few.

Instead, find out what this person actually does.

The Department of Labor publishes a pretty good list of questions to start with. And Forbes has published numerous stories on how to pick an investment advisor. To add to these resources, I’ve developed a list of six questions that I think provide the most revealing answers. Have it in front of you when you grill a prospective advisor:

1. Who is actually managing my investments? A genuine advisor keeps your funds in a discretionary account and can conduct transactions involving individual stocks, bonds, ETFs, mutual funds and so on without your trade-by-trade approval. Beware the investment pro who claims to be a “money manager” and touts his “assets under management” but is really just a middleman between you and another investment advisor doing the investment research and management.

2. What is your track record? Ask for a copy of the Form ADV, which discloses possible conflicts arising from securities trades and answers a lot of other questions. Also request a risk-adjusted performance record going back at least five years, in writing. Get a list of client references—and call them.

3. What is your background? Many registered investment advisors have advanced degrees in business and finance and years of experience as investment analysts or traders at major financial firms. Be wary of an advisor with little or no previous experience outside of his or her years in brokerage and/or insurance sales.

4. Who pays you? Virtually all the compensation an investment advisor receives should come directly from his clients. Any other sources of income should be insignificant and fully disclosed. Brokers, on the other hand, can earn commissions on trades, trailer fees for mutual funds and annuities, and bonuses tied to their firm’s proprietary investment products or trading. These other sources of income create lots of conflicts.

5. Can I pay you by the hour? The going rate for a genuine financial advisor has historically hovered around 1 percent of assets under management. But one benefit of the Internet has been a dramatic reduction in transaction costs. If you and your advisor agree that most or all of your money should be put in a mix of index funds, mutual funds and exchange-traded funds that’s practically on autopilot, ask him to charge less. Get him to subtract the cost of the fund expenses from her percentage. Or better yet, ask if you can pay by the hour, as Forbes’ William Baldwin suggests here.

6. Are you always legally bound to act in my best interest? The answer has to be yes, all of the time. If it is, get it in writing. This is fiduciary duty. It’s a well-established legal principle, backed by decades of precedent. An advisor who acts as your fiduciary knows you can haul her into court or, if you agree, arbitration.

Finally, beware of any “advisor” who swears you’ll always be the boss. From a legal standpoint, brokers are free to carry out your orders, even ones they think are unwise. But mindful of his fiduciary duty, a true advisor will say he’d decline to make an investment he believes could threaten your financial health. At the very least, he should try hard to talk you out of it. If he can’t, he should give you your money back and let you go it alone.

Kenneth G. Winans is a veteran investment manager based in Novato, Calif. ... l-advisor/
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Thu Sep 12, 2013 8:32 am

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From: Knut A. Rostad []
Sent: Tuesday, September 10, 2013 5:48 PM
To: Knut A. Rostad
Subject: Institute Releases Fiduciary Duties Paper; Cites SEC Case in Explaining What Fiduciary Duties Mean for Investors


The Institute for the Fiduciary Standard continues its celebration of Fiduciary September with the release of a paper, “Six Core Fiduciary Duties for Financial Advisors,” today. It is attached.

The paper seeks to explain what these six duties mean to investors and uses an SEC case to do so. The case In the Matter of Arlene Hughes offers a valuable lesson. Arlene Hughes, a dually registered broker – advisor, sells her own securities to her clients, who by all accounts, trust her emphatically. In her clients’ eyes, Hughes is portrayed a true fiduciary. Unfortunately, however, the SEC found in its fact finding that Hughes’ clients failed to understand that Hughes chose to put herself in a conflicted position, and clients also failed to understand what that conflicted position meant to them.

The SEC’s handling of this case is important. Its clear and concise explanations of many issues central in the today’s discussion of potential rulemaking stand out. Conflicts of interest, the nature and meaning of disclosure in different circumstances, and the responsibilities of both the advisor and the client are addressed. The meaning of loyalty is articulated in meaningful terms. The relationship between loyalty and conflicts is discussed. You will find this case of interest.

Thank you for your interest in this issue. Please contact me with any questions or comments.


Knut A. Rostad
Institute for the Fiduciary Standard
703-821-6616 x 429
301-509-6468 cell


study mentioned above is found here: ... Duties.pdf
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Jun 10, 2013 8:08 pm

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Fiduciary advocates warn SEC not to water down uniform standard
InvestmentNews roundtable panel debates rules for advisers vs. brokers

By Mark Schoeff Jr.
Jun 10, 2013 @ 3:35 pm (Updated 4:46 pm) EST
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Fiduciary standard debated at InvestmentNews roundtable.
Advocates for strengthening investment-advice rules for brokers are warning the Securities and Exchange Commission not to dilute the standard that currently applies to investment advisers — acting in the best interests of clients.

As the July 5 deadline approaches for comments on a SEC cost-benefit analysis of a potential uniform fiduciary standard, investment-adviser groups are concerned about assumptions included in the request for information.

The parameters are designed to give respondents an idea of how a uniform fiduciary duty might work. But they are making fiduciary proponents nervous.


“Don't water down this [fiduciary] duty that has been very well-established and do not create different standards of care for different kinds of clients,” David Tittsworth, executive director of the Investment Adviser Association, said Monday during the InvestmentNews Regulatory Roundtable in Washington.

Mr. Tittsworth's organization was one of nine that signed a June 4 letter to SEC Chairman Mary Jo White asserting that if the parameters in the cost-benefit analysis request were used to draft a uniform fiduciary rule, it would significantly weaken the fiduciary standard for investment advisers. Advisers must act in the best interest of a client, while brokers meet a less strict suitability standard when selling financial products.

“This approach is one that would have negative consequences for advisers and is one we would vigorously oppose,” the letter states.

The parameters include those that follow provisions in the Dodd-Frank financial reform law, such as allowing brokers to continue charging commissions and selling from a menu of proprietary products and not subjecting them to a continuing duty of care or loyalty to a retail client.

Another guideline in the SEC release is that the application of the fiduciary standard of care could be determined in a contractual arrangement between an adviser and client, which closely follows the fiduciary framework submitted to the SEC by the Securities Industry and Financial Markets Association in July 2011.

“A key concept is missing from these assumptions, and that is 'the best interest of the client,'” Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc., said during the roundtable. “[The] assumptions seem to lead to a disclosure-only fiduciary standard.”

Throughout the information request, the SEC reiterates that the assumptions do not automatically influence any rule that is drafted.

Ira Hammerman, SIFMA's managing director and general counsel, said that his organization supports a best-interests investment advice standard. In addition, he noted that the Dodd-Frank law stipulates that a uniform standard must be no less stringent than the one advisers currently meet.

“Everyone should have the comfort that Dodd-Frank itself, the actual law, prevents any watering down,” Mr. Hammerman said at the roundtable discussion. “No one is looking for fiduciary-light or any sort of minimal fiduciary standard. What we are looking for is clear guidance” on how a uniform standard would work across advice business models.

Many industry participants argue that a uniform fiduciary standard must not limit access to advice for investors with modest assets, who may not be able to afford fee-only advisers.

“Our bottom line is, we're looking to avoid those unintended consequences of not giving advice to the small investors,” said Dale Brown, president and CEO of the Financial Services Institute.

The Dodd-Frank law authorizes the SEC to release a uniform fiduciary-duty standard, but the agency has moved slowly on the rule.

A big challenges is writing a rule that can apply equally to advisers and brokers.

“It's the context that makes the difference,” A. Heath Abshure, Arkansas' securities commissioner and president of the North American Securities Administrators Association Inc., said during the InvestmentNews event.

Mark Schoeff Jr. Email @twitter LinkedIn Google
Mark Schoeff Jr. covers legislation and regulations affecting investment advisers and brokers and wants to hear from you about how Washington policymakers are influencing your business. ... _term=text
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Thu May 30, 2013 6:57 pm

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Fiduciary duty costly…to those who do not wish to provide and take responsibility for structured advice…
Posted on May 29, 2013
The current suitability regime is a flag of convenience, a get out of jail card and it should no longer be relied upon by regulators to protect investor interests. FULL STOP/PERIOD.

I would like to comment on a recent Investment Executive article titled “Fiduciary duty costly for dealers, advisors suitability standard costly to investors”. The article drew on comments made by David Di Paolo, a partner of Borden Ladner Gervais and references the recent CSA consultation regarding the proposal to introduce a best interests standard.

“Imposing a fiduciary duty against financial advisors would have significant legal implications for advisors, and would substantially increase costs for dealers, ultimately forcing many small dealers out of the market, according to David Di Paolo, partner at Borden Ladner Gervais….”

First of all, the current transaction driven industry is incompatible with a fiduciary duty, and the liability structure of a transaction driven model within a fiduciary regulatory structure would, I agree, be insane. But this is no argument against its introduction!

These firms, or dealers, as they currently stand would not be able to function as is within a fiduciary model. Instead of relying on product distribution and other transaction initiation for their revenue, they would need to rely on revenue from advice, and would need to change their processes and systems to one capable of delivering well structured wealth management solutions.

No longer would the salespersons be deciding what and where to invest, how to assess risk, how risk profiles and investment objectives related to recommendations and structure, but these would all be centralised and formalised, considerably reducing the costs and the risks of delivering a fiduciary standard solution. The advisors would be the client relationship managers, delivering well structured investment solutions.

“The most significant impact for advisors, Di Paolo said, would be a diminished ability to defend themselves against liability in cases where clients have suffered investment losses.. one common defense available to advisors dealing with client losses under the existing regulations is suitability – proving that the investment they recommended was suitable for the client after having gathered the appropriate know your client (KYC) information. Under a fiduciary standard, this would no longer constitute a sufficient defense, Di Paolo. Suitability will no longer be the standard,” Di Paolo said. “Therefore, even a suitable recommendation – one consistent with the KYC – could result in liability.”"

If you are reliant on transacting, you would want to limit the constraints on the time it takes to transact and the costs of the transaction. The current suitability standard is limited for this very reason, and the information required to generate a suitable trade is different from the information and standards needed to provide a recommendation that fits into a well structured, planned and appropriately managed framework. The current suitability framework is a crude and quick parameter to parameter framework reliant on the investor taking responsibility for the transaction decision. It does not however match the representation of service being made and the expectation of service being assumed. This has been known for a while and it was the central focus of the OSC’s earlier FDM model.

But it is not just the limitations of a parameter to parameter framework, that make it difficult to ensure that recommendations are made in the client’s best interests and reflect their risk aversion/risk capacity, existing assets and financial needs (which is too complex a process for a back of the envelop suitability structure to deal with), that invalidate the process. The fact that the whole structure and operation is decentralised means there is considerable room for discretion amongst advisors as to how to interpret the framework and considerable room for abuse. This could not happen to anywhere near the same degree in a centralised, process driven structure with fiduciary responsibility for those processes – red flags would be waving immediately you stepped outside of its boundaries and the returns would not be influenced by the transaction, but by the service..

Hence, the true liability of a transaction regime, in terms of its failure to deal properly with the real environs of suitability, would be borne by the firms who benefit from those transactions. The current suitability regime is a flag of convenience, a get out of jail card and it should no longer be relied upon by regulators to protect investor interests. FULL STOP/PERIOD.

Another common defense is contributory negligence – the concept that the client bears some responsibility for his or her own decisions to invest. Under a fiduciary standard, however, that responsibility would essentially be transferred to the advisor. “The notion of client responsibility is turned completely on its head,” Di Paolo said. “The client bears absolutely no responsibility for his or her poor choices, even though the client is the ultimate decision maker.”

The problem with contributory negligence is that the risks and omissions of the process are not known to the investor. If they were they would likely not seek advice under the transaction framework. Again, I would like to reference the simplifying assumptions that need to be made in order for the investor to be realistically capable of taking responsibility for the investment recommendation under the current transaction system – please see Appendix A in my submission to the OSC on this matter.

With regard to the client bears no responsibility under a fiduciary framework, I would have to disagree. If the processes and structure and communication that underpin the advisory portfolio construction, planning and management process have integrity, the investor can take responsibility, while dependent on the integrity of the processes, for the generics of the decision, but they would have much more information on the risks of the approach and the rationale. In other words, the investor would have less leeway to place the liability on the advisor within a formalised best interests standard investment process. The problem with using the current limited standards is that there is limited definition, structure, communication, organisation and integrity. Relying on limited standard parameter to parameter suitability processes is just asking for trouble if you are intending to use that process to deliver advice.

Borden Ladner Gervais seeks only to defend a business model that could not survive with the higher standards that would be needed to deliver the promise of service that many make and without which the industry, likewise, could not survive. The industry wants to have their cake and eat it, which is possible only if the misrepresentation of the client/advisor relationship is allowed to continue as it is. This is the shocking and disturbing aspect of this article. Simple transaction based services are incompatible with best interest standards.
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Thu May 30, 2013 12:57 pm

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Browse: Home / Conflicts of Interest / Exclusive Interview with CFA’s Barbara Roper: Why a Fiduciary Standard Helps All Investors and 401k Plan Sponsors
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Exclusive Interview with CFA’s Barbara Roper: Why a Fiduciary Standard Helps All Investors and 401k Plan Sponsors

By Christopher Carosa, CTFA | May 21, 2013

What is the most obvious reason we should have a fiduciary standard? Why is the biggest fear not that regulators don’t act, but that they do? How come annuity sales organizations are among the most vocal opponents of the fiduciary standard? Why is investor education not the barrier many believe it to be? What more consumer-friendly term should replace the term “fiduciary duty”? What’s the one thing all 401k plan sponsors should ask their adviser? Why will fiduciary advisers will never be able to convincingly market themselves? How could the SEC have prevented this entire fiduciary mess in the first place?

These are just a few of the amazing answers Consumer Federation of America’s director of investor protection Barbara Roper offered our readers when she agreed to sit down with for an exclusive interview. And, boy, did she wow us! A leading consumer spokesperson on investor protection issues, Roper currently serves as a member of the Securities and Exchange Commission’s Investor Advisory Committee as well as the Public Company Accounting Oversight Board’s Standing Advisory Group and its Investor Advisory Group. She has received distinguished service awards from the National Association of Personal Financial Advisers and the North American Securities Administrators Association and the Consumer Excellence Award from Consumer Action. In 2012 she was recognized as a “Money Hero” by Money Magazine.

FN: Barbara, it’s an honoring speaking to you. Tell us a little about the CFA, when its started, what’s its basic mission and one or two of its highlight achievements.

Roper: CFA was formed in 1968 to provide a voice in Washington for the consumer movement. As our name suggests, we are a federation of national, state and local consumer organizations. We work on a broad range of consumer issues, including food and product safety, energy efficiency, telecommunications policy, and privacy. But we have always had strong concentration in financial issues, including banking, insurance, and high cost credit, along with the investor protection issues I work on. Just in the last several years, CFA was heavily involved in successful efforts to get the automobile fuel economy standards raised, to pass the Consumer Product Safety Improvement Act, and the Food and Drug Administration Reform Act. And, of course, CFA was heavily involved in the legislation fight for Wall Street reform following the financial crisis, including creation of the Consumer Financial Protection Bureau.

FN: How long has the CFA been involved in safeguarding investors and what is an example (outside of the fiduciary realm) of an issue it’s worked on?
Roper: I guess you could say I launched CFA’s investor protection efforts when I joined CFA in 1986. I had been hired to edit the organization’s publications. Almost by chance, I was asked to write a study on financial planning abuses, which received a tremendous amount of press coverage when we released it in 1987. The consumer movement had really neglected investor protection issues before that time, so by default I become the consumer movement’s investor protection “expert.” At the time, NASAA and congressmen Dingell and Markey were really leading the charge on those issues, and I got swept along. Over the years, I’ve tended to focus on what I think of as retail investor protection issues – issues like mutual fund disclosure and regulation of the financial professionals investors rely on for advice and recommendations. But because of our markets’ recent tendency toward crises, I’ve spent an inordinate amount of time on more structural issues, such as the auditing reforms adopted in the wake of the Enron scandal and issues related to asset backed securities, credit rating agencies, and derivatives in the wake of the most recent financial crisis.

FN: When and how did the issue of the fiduciary standard appear on the CFA’s radar?

Roper: I like to say I’ve been working on the fiduciary standard issue, in one form or another, since I joined CFA in 1986. People tend forget that, at the time, many financial planners were as resistant to the notion that they should have a fiduciary duty when implementing their plans as brokers are today. So my original study on financial planning abuses included a call for financial planners to be subject to a fiduciary duty throughout the planning process, including when they were selling products to implement their recommendations. Our efforts to ensure that brokers are subject to a fiduciary duty when they give advice grew out of that, particularly as brokers began increasingly to use titles that implied they were advisers and to market their services as if they were primarily advisory in nature. We concluded that either they were misrepresenting the services they offer or they had long since ceased to qualify for the “solely incidental to” exception from the Investment Advisers Act under any reasonable interpretation of that phrase. Clearly, they were marketing themselves in ways that were designed to create the sort of relationship of trust that creates, or ought to create, a fiduciary obligation.

FN: Why do you think the fiduciary standard is so important?

Roper: The longer I work on this issue, the more convinced I become that ensuring that all advice is subject to a robust fiduciary standard is the most important thing we can do to improve protections for average investors. We all know that investors can’t distinguish between brokers and investment advisers, particularly since brokers have been allowed to re-brand themselves as financial advisers. They don’t understand the difference between a fiduciary duty and a suitability standard. They certainly don’t understand that their investment adviser has to act in their best interest, but their financial adviser doesn’t. And why should they understand it? It doesn’t make sense. The upshot of all of this is that the typical investor simply can’t make an informed choice between the different types of financial professionals. Beyond that, we know that the typical investor is also ill-equipped to evaluate investments, does very little independent research of the investments recommended to them, and relies heavily, if not exclusively, on the recommendations they receive. That makes investors extraordinarily vulnerable and is precisely the sort of relationship of trust that demands fiduciary protection.

FN: What do you suggest be done to make ordinary investors more aware of the importance of using a fiduciary?

Roper: I am actually quite skeptical that this is a problem that lends itself to an investor education solution. If we are going to have a chance to change investor behavior, we are going to have to stop talking about a fiduciary duty and start talking about the best interests of the customer, even if that only partially captures the extent of fiduciary protections. In addition, I think it is long past time we had a pre-engagement disclosure document that all financial professionals are required to provide that covers these basic questions: Who are you? What services do you provide? What will I pay? How do you charge for your services? What are your conflicts of interest? And are there any significant blemishes in your disciplinary history? Even then, however, I think the real answer is to ensure that anyone who is acting as an adviser – or holding themselves out in a way that creates a reasonable expectation that they will be acting as an adviser – has to be held to a fiduciary standard. That’s the right policy for a number of reasons, not least because it doesn’t limit its protections to the most knowledgeable investors who are able to make an informed choice.

FN: What regulators have you (or the CFA) been in contact with and what have you taken away from those discussions?

Roper: I’ve talked to pretty much anyone and everyone who will listen. Since about 2000, my first communication to each incoming SEC chairman has been a letter on the need to raise the standard of conduct for brokers giving investment advice. Most recently, I used the opportunity of my “get to know you” meeting with new SEC Chair Mary Jo White to emphasize the importance of this issue for retail investors and, admittedly in very general terms, to raise concerns we have about what we see as some pretty gaping holes in the fiduciary standard that appears to be contemplated by the SEC’s recently released request for information.

Chair White didn’t strike me as someone who shows her cards before she is ready, but she certainly seemed to recognize the importance of the issue. I’ve also met several times with Phyllis Borzi and her staff at DOL, who despite the resistance they are receiving, appear to be hard at work finalizing their proposed fiduciary definition, prohibited transaction exemptions, and economic analysis. A lot of the opposition to the DOL proposal is based on speculation about what form it is likely to take, so we’re anxious to see actual language so that we can move from a debate about fears to a discussion based on facts.

FN: There’s a lot of horror stories when it comes to the financial industry. What is your biggest fear should Washington continue to allow non-fiduciaries to offer “advice” in the guise of selling?

Roper: The worst horror stories involve conduct that violates not just a fiduciary duty, but a suitability standard as well. The harm to investors from conduct that complies with the suitability standard tends to be more subtle, which is of course one of the reasons it is so hard to get regulators to act. So I guess I have two fears, one based on regulators’ doing nothing, and the other based on regulators’ adopting a rule that appears to raise the standard but doesn’t really change anything. If you read between the lines of the SEC’s recent request for information, that second option appears to be a very real risk.

In either case, we just get more of what we have now – investors who need to make every penny work for them paying too much for mediocre investments based on recommendations that don’t adequately assess what is in their best interests. Those investors may not have headline-grabbing horror stories to tell, but they end up with less money to retire on than they need to live comfortably or having to borrow extensively to fund their children’s college education. At least if regulators do nothing, we’ll be able to continue to press for action. If they pretend to adopt a fiduciary standard, but really just require brokers to make a few more disclosures about conflicts of interest, then we’ll have lost the opportunity to solve the problem for some years to come without have achieved any meaningful new protections for the customers of broker-dealers. Based on the assumptions in the SEC’s recent request for information, I am very concerned that this may be the direction in which it is currently headed, but I think we still have an opportunity to turn that around.

Actually, I have a third fear, and that is that the SEC adopts a tough fiduciary standard, and the broker-dealers who are brokers solely because they sell a few variable annuities will simply switch to equity-indexed annuities to evade the rules. After all, there’s a reason NAIFA and AALU have been the strongest opponents of a fiduciary standard. It is the brokers whose business is based on selling high-cost variable annuities loaded up with features the investor doesn’t really need who would be most affected by a strong fiduciary standard. Until we rationalize our regulatory approach to eliminate the inconsistency in standards across the financial services more generally, there will always be loopholes that financial service providers can use to evade effective regulation.

FN: Many of our readers are 401k plan sponsors. What can they do to insure they conduct the proper due diligence to insure their adviser is a real fiduciary?

Roper: [Editor’s Note: Roper starts by saying, “This isn’t really my area of expertise.”] I think the simplest answer is to ensure that their so-called adviser really is an adviser, for example a registered investment adviser, who is automatically subject to a fiduciary duty with regard to all their clients in all circumstances. After all, even if the SEC adopts a fiduciary standard for brokers, it will apply only to retail investors, so it is not clear how plan sponsors would be affected. That’s one reason the DOL rulemaking is so important. They need to close the loopholes that currently make it all too difficult to enforce the existing fiduciary standard.

FN: The vast bulk of our readers are in the financial service industry. How would you advise them to best promote their fiduciary services in a way that resonates with their clients?

Roper: One of the reasons I believe so strongly that we need to raise the standard for brokers is that I don’t think it is possible to compete effectively based on their heightened legal standard fiduciaries are subject to. As long as brokers are allowed to call themselves financial advisers, offer investment “planning” and retirement “planning” and other such advisory services, and market themselves as if they are acting as trusted advisers, investors are going to believe that that’s what they are, and true fiduciaries are going to find it difficult if not impossible to differentiate themselves. After all, research shows that investors don’t understand the difference between a fiduciary duty and a suitability standard, and many of them actually believe that suitability is the higher standard. So the only advice I guess I can offer is to continue to serve your clients’ best interests and let the results speak for themselves – that and join us in the fight to get a true, meaningful fiduciary standard applied to all investment advice regardless of the source.

FN: Lastly, we do have a number of regulators among our readership. What advice would you give them when it comes to drafting fiduciary language?

Roper: In a very real sense, the Securities and Exchange Commission created the problem that we are dealing with today because it put brokers’ interests ahead of investors’ interests. When brokers first started calling their sales reps “financial consultants” and “financial advisers” and offering financial plans and generally rebranding themselves as advisers, the Commission could have nipped it in the bud. They could have said that if brokers wanted to compete as advisers they had to be regulated as advisers. Brokers would then have been forced to make a simple business decision – did the benefits of competing as an adviser outweigh the costs of regulation as an adviser. But the SEC was so anxious to accommodate the broker-dealer community that it failed to meet its responsibilities to investors, and the result is the marketplace we see today – a blurring of lines between brokers and advisers, a significant overlap in the services they offer, inconsistent standards governing those services, and no conceivable way that the typical investor will ever be able to make sense of it.

That’s water under the bridge. But it is absolutely essential that regulators don’t make that same mistake again. That doesn’t mean that we are advocating a purist approach that doesn’t allow for a transaction-based business model. On the contrary, we believe there are investors for whom this is an attractive alternative, as long as the advice or recommendations they receive are truly designed with their best interests in mind. Simply requiring a few additional disclosures about conflicts of interest is not going to get us there. Any fiduciary rule must include a clear, enforceable, principles-based standard requiring the broker to have a reasonable basis for believing that their recommendation is in the best interests of the customer. That doesn’t mean the broker can’t get paid for his or her services. It doesn’t mean they can only recommend no-load products. But it does mean they can’t ignore costs or other considerations, such as tax consequences, that are important to the customer’s financial well-being. And once the rule is adopted, it doesn’t end there. The regulators need to be prepared to enforce the rule in a way that truly enhances protections for investors.

FN: Any final thoughts you’d like to leave our readers?

Roper: This has been an inordinately long fight, and it sometimes seems that we have precious little to show for it. But there has been progress. In the 1980s, many financial planners resisted the notion that they had a fiduciary obligation throughout the planning engagement. Now that is conventional wisdom in the planning profession. It wasn’t that long ago that the broker-dealer community denied that investors were confused. Now that is widely accepted by virtually all parties to this debate. And, while we may have disagreements over what a fiduciary standard for brokers should look like, the main trade association for brokers, SIFMA, has taken a major step in acknowledging the need for such a standard. We have an opportunity to make real progress. We mustn’t let it slip away with half measures and empty gestures that offer the appearance, but not the reality, of reform.

FN: Barbara, on behalf of and its many readers, thank you very much for taking the time to share your thoughtful insights and powerful advice with us. We can only hope our readers pass your ideas on to the right people. ... -sponsors/
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Mar 15, 2013 8:26 pm

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Canadian financial advisors are not subject to a fiduciary duty to their clients by law, which puts an onus on financial advisors to have their paperwork in order.

“There’s nothing specific in law that requires an advisor to put a client’s interests ahead of his own,” Ilana Singer, Toronto-based securities lawyer and Deputy Director of the Canadian Foundation for Advancement of Investor Rights (FAIR Canada).

Ms. Singer told Financial Planning Week’s 2020 Vision Symposium in Toronto last October, that Canada’s courts decide on a case-by-case basis whether a fiduciary duty exists. “A court’s determination is based on an examination of the specific facts of each case. Canadian courts have generally found fiduciary duties to exist in client-advisor scenarios where elements of trust, confidence, vulnerability, and reliance on skill, knowledge and advice are present.
“Another factor that courts look to are the professional rules or codes of conduct governing the actions of the advisor,” she added.
Ellen Bessner, senior litigation partner at Cassels Brock & Blackwell LLP in Toronto, said that legislating the formal designation of advisors as fiduciaries is an unnecessary step. “Financial planners need to be honest, trustworthy and put their client’s interest first – and disclose any conflicts of interest,” she said. “The word ‘fiduciary’ doesn’t mean anything.”

Advisors need to document their clients’ level of financial sophistication, Ms. Bessner emphasized. “Paper your file with questions that tell you how sophisticated your clients are. Do they ask intelligent questions that show they’re not asleep at the wheel? Do they read their financial statements? Do they understand them?”
Advisors need to make sure their letters of engagement and investment policy statements clearly outline mutual expectations and the manner in which the advisor is being paid.
And advisors who are only licensed to sell mutual funds and insurance have to tell their clients the parameters within which they can operate, and what their clients’ other options are, Ms. Bessner added.
Because courts look to codes of conduct set by professional associations, these organizations have to set standards for their members’ fiduciary obligations to clients, noted John Murray, Vice President of standards enforcement at the Institute of Chartered Accountants of Ontario.
And the standards need to define very clearly just what putting the client’s interests first means, Mr. Murray added. “Some of the current commission structures could be seen to be violating this principle.”
John DeGoey, Vice President at Burgeonvest Bick Securities Ltd. in Toronto, added that firms that provide financial or other incentives for investing clients in certain products may be causing their advisors to cross the line. ... ur-clients’-level-of-financial-sophistication/
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