In my Fiduciary Corner column in Investment News this month, I make the case that advisors who work in wire-house firms should be, and often are, among the strongest proponents of the Obama Administration's proposal to extend fiduciary status to anyone who gives advice. If enacted, the proposal is likely to require brokerage firms to retool their management, sales and compliance structures for all but the purely transactional (generally online and/or discount) segment of their businesses.
There are many brokerage-based advisors who recognize that investment advice is a fiduciary function and are well prepared to embrace the change in regulatory approach and the resulting operational and cultural changes that are likely to occur. Here are five reasons why:
1. These advisors have already been operating under a fiduciary ethic (i.e., placing clients' best interests first and adhering to fiduciary duties) but have been constrained by suitability-oriented sales and compliance infrastructure and culture. They are often unable to use professional designations that may imply fiduciary status (e.g., AIF, AIFA, CFP, etc.) and to accept fiduciary status in writing.
2. As more clients and prospective clients become aware of the importance of working with a fiduciary when they seek investment advice, those who can and will acknowledge fiduciary status have a clear competitive advantage.
3. In a predominately suitability-oriented organization, training, resources and support for fiduciary activities are often inadequate. This will have to change if all forms of investment advice are subject to fiduciary laws and regulations. Already, a number of large wire-houses are beginning to plan or establish separate units within their organizations where the business model will be designed to foster a culture of fiduciary responsibility.
4. Products built for a suitability distribution network generally don't work well for distribution through fiduciaries. Sales incentives create conflicts and elevate internal expense levels. Imposition of the fiduciary standard should spark development of more products that are designed to compete on their investment merits alone. In a sales/suitability environment, YTB (yield to broker) is a necessary factor to consider because compensation is typically built into the product by the investment company rather than assessed at the overall account-level where compensation is set by the advisor.
5. Under the law, investment advice is recognized as a fiduciary service and advice givers may be held personally accountable for compliance with applicable fiduciary requirements. If a company-imposed suitability defense to a claim of fiduciary breach fails, the advisor's best defense is to be able to demonstrate that they adhered to fiduciary practices. It is much easier for an advisor to adhere to the fiduciary standard if the organization is geared to promote and sustain fiduciary conduct in all aspects of their business model.
I have received many calls and emails from brokerage-based advisors. Most have been supportive of the Administration's plan to extend fiduciary status to all advice givers, primarily for the reasons given above. I welcome you to post your thoughts about this aspect of the Administration's financial regulatory reform plan as well.
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