fi360 Blog

New Clarity in the Regulatory Debate

While FINRA chief Richard Ketchum and SEC Commissioner Elisse Walter captured the headlines in recent weeks advocating SRO oversight of investment advisers and calling for a yet to be defined fiduciary standard for professional advisors, SEC Commissioner Luis Aguilar delivered a speech with contrasting views that brings clarity and precision to the regulatory debate on investment adviser and broker-dealer regulation.

In his address to the Investment Advisers Association earlier this month, Aguilar called into question proposals for a universal standard of care or other fiduciary-like standards, stating it’s unclear whether these standards measure up to the existing fiduciary standard. “[T]here is only one fiduciary standard and it means that a fiduciary has an affirmative obligation to put a client’s interests above his or her own,” he explained.

Aguilar also highlighted a key point seemingly ignored by others in the regulatory debate: the investment adviser industry has not materially changed its services in the past 15-20 years, while services of the brokerage industry have moved closer to the investment adviser industry. As such, discussions of “harmonizing” the investment adviser and broker-dealer regulatory structures or adopting new “universal” standards for investment advisers and broker-dealers appear to be missing the mark. According to Aguilar, “the better way to frame the issue is to ask how broker-dealers who provide investment advice should be regulated.”

Ultimately, Aguilar believes there is no real question what standard should govern broker-dealers that deliver investment advice - the fiduciary standard must apply. Accordingly, he called for advocates who seek to strengthen investment adviser regulation to “keep sacrosanct a real fiduciary standard.”

Aguilar also advocated that the best way to protect the fiduciary standard is to keep investment adviser oversight in the hands of the SEC, rather than passing the reins to an SRO. As noted in his speech, for the past 70 years the SEC has been prosecuting fiduciaries for breaching their duties and failing to mitigate or disclose conflicts to their clients. Moreover, the agency possesses the necessary experience of administering the principles-based regime upon which the investment adviser regulatory structure is based. No existing or proposed SRO can make such claims, and Aguilar argued that handing over control to an inexperienced entity “would be too costly for the industry and for the public in terms of both dollars and investor protection.”

In a debate that appears to have been fueled by broker-centric arguments, Commissioner Aguilar has provided a clear and logical counter-argument that better recognizes the fiduciary responsibility of those that advise investors and proposes a consistent and comprehensive system of regulation.

Fi360 fully supports Aguilar’s views on the existing fiduciary standard and regulatory oversight of investment advisers and intends to send a letter to SEC Chairman Mary Schapiro and her fellow Commissioners urging them to: (1) protect the strong fiduciary standard that exists under the Investment Advisers Act of 1940 and has been enforced by the Commission for nearly 70 years; (2) apply that fiduciary standard to broker-dealers who provide advice; and (3) ask Congress for the resources needed for the SEC to remain the regulator of the investment adviser industry. For anyone else interested in supporting Aguilar’s position, you can find the SEC Commissioners’ names and SEC Headquarters address on the SEC website.

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Fi360 Webinar Reminder: On Tuesday, June 2, from 4-5 p.m., we'll be holding a free webinar on the regulatory reform debate.  Kristina and Blaine will be discussing the strengths and weaknesses of regulatory reform proposals that have been made so far, what fi360 would like to see in reform, and how the delivery of financial services would change under that scenario. The session also will include steps you can take to affect change and an opportunity for Q&A at the conclusion. To register click here and make sure you share this info with anyone else you think may find value in this discussion.

What would be different under a "universal" fiduciary standard?

Now that we've called for a fiduciary standard for all investment advice (and we mean a real fiduciary standard), the next question is, "ok, why?" or, "how would it change things?" 

In his May Fiduciary Corner column, Blaine takes a look at this question and arrives at six significant changes for the benefit of the investor.

1. Greater accountability for adherence to professional principles and reduced reliance on prescriptive rules.
2. Consistent emphasis on competent management of portfolios.
3. Reduction or elimination of sales-based compensation systems.
4. Increased emphasis on investment expertise.
5. Investment products will become more competitive on the basis of their merits as investments.
6. Currently low public perceptions of financial intermediaries and advisors will climb as a new era of fiduciary responsibility and accountability takes hold and the positive outcomes above become widely recognized.

Of course, these benefits can only be recognized if a true, ERISA-level fiduciary standard is applied for all investment advice.  If we see a watered-down version that seeks to meet the suitability standard in the middle, consumers will still be the ones who suffer as conflicts of interest continue to result in substandard products, services and standard of care for investors. 

Make sure you read Blaine's full article at InvestmentNews.com and click the "Recommend" button at the top of the page if you like it.  And, make sure to leave your thoughts in the comments section below.

Conference Wrap-up

First off, thanks to everyone for helping make the 2009 fi360 National Conference an overwhelming success.  The conference committee and staff all contributed greatly with many hours of work and planning.  The speakers, attendees and facilities also were all excellent. 

It is evident that the conference is an energizing event that inspires everyone involved to do more to propel the industry towards a fiduciary society where "everyone looks out for each other," as general session speaker Bob Veres put it. One Twitterer (Carl Richards of Behavior Gap: @behaviorgap if you're on Twitter) from the conference said of our event "Some really, really, smart people here. Talk about a secret society of real financial planners! More people have to know this." and "The fi360 conference was the best I've been to! Very impressed!" It is comments like this that let us know we're gathering a special group. 

The major themes of the conference were the lessons learned from the economic crisis of the past six months or so and the unique opportunity that exists today to help create that fiduciary society. Market turmoil, investor distrust of the industry, and increased focus from professionals, investors, regulators, legislators and the media have made major changes imminent and the question left is if the changes will be done right and for the benefit of investors.  The first and best thing the professionals can do to affect positive change is to apply the highest standard of care to their investment processes regardless of what minimum standards they are actually held accountable to and to act as advocates to whatever extent is available and possible for them. 

If you are interested in learning more about the conference, most materials and handouts are available from our conference portal and recordings of the sessions should be available towards the end of the month.

Finally, here is what others are saying about the conference, we'll update this list as more becomes available.  And, if you are on Twitter, make sure you check out the #fi360_09 hash tag to review the Tweets and Re-Tweets from conference attendees and speakers and their followers.  Also make sure you add us, @Fiduciary360, as a follower.

• From Twitter: @marionasnes, @behaviorgap, @grgay74, @actiumbemanaged, @mlimbacher
• Conference speaker Josh Itzoe from the Fixingthe401k Blog

fi360 Conference and our one-year anniversary!

Hello from the fi360 Conference.  We kicked off this morning with opening remarks from Blaine, a general session from Fred Reish and the first round of breakout sessions.  This is our fifth annual conference and hopefully our best yet.  In addition to the conference activities, we also held an AIF Capstone program and an fi360 Toolkits Workshop in the previous few days here in Scottsdale. This picture is of our Tools Product Manager Dave Palascak doing some one-on-one interaction from the workshop:

 

Blaine's opening remarks were about the great opportunity we currently have to see a robust, ERISA-level fiduciary standard applied universally for all investment advice. The real danger is a watering-down effect as fiduciary levels of care are applied to the commercial standard and the two standards are "harmonized."  He then called on the conference attendees to work as advocates where they can, through public and private speaking, involvement in professional associations, and always providing their services to the highest level care.

We'll post updates as the conference goes on and we're also live-Twittering, so make sure you follow us on Twitter, and note the Twitter feed to the right of this posting.  We also have some attendees sending in their live Tweets, so make sure you check out BehaviorGap, Actium, and George Gay.  If you are here in Scottsdale and Tweeting, make sure to use the #fi360_09 hash tag so that we can find your updates and plug your Twitter account.

Finally, we'd like to point out that this is our one-year anniversary! It was day one of last year's conference that we publicly launched the blog.  We hope that we've gotten better at it over the last year and thank everyone for helping our readership consistently increase over that time.  We're also looking forward to our new hire Kristina Fausti (see our last post) getting into the swing of things as we expect her to be a valuable blogger for fi360.