The first batch of letters, intended to help guide the Securities and Exchange Commission’s formulation of a fiduciary duty rule, are in—and they cover fairly predictable ground. Less predictable: tougher standards may be on the way from a non-regulator.

In April 2016, the Labor Department finalized a new rule that creates a fiduciary duty for brokers and registered investment advisers who offer retirement advice. In broad terms, without granted exceptions, fiduciaries are prohibited from receiving commissions, which are considered to present a conflict of interest.

In February, President Trump ordered the Labor Department to prepare an updated economic and legal analysis, a likely prelude to rescinding or revising the rule. While that review is underway, an initial batch of compliance obligations began on June 9.

Just prior to those first compliance deadlines, SEC Chairman Jay Clayton opened a public comment period that may empower his Commission to either supplement or supplant the Labor Department’s rulemaking. Shifting agency oversight is among the demands those most critical of the Labor Department’s “Hail Mary” rulemaking in the final days of the Obama Administration.

“The concept of a rule which protects investors from unscrupulous advisers is a sound one. However, in creating the rule I believe the Labor Department went beyond the scope of protecting investors from the minority of ‘bad’ financial advisers by over-burdening ‘good’ financial advisers,” wrote Herbert Morgan, a registered investment advisor with Efficient Market Advisors, a division of Cantor Fitzgerald Investment Advisors, in one of the letters delivered to the SEC.

 “The fee issue would be solved with greater disclosure requirements,” he wrote. “The Labor Department, with the assistance of the Commission and the industry, could develop a simple, half-page fee and liquidity disclosure form that would be required with subscription to any investment. This would have an immediate impact on adviser behavior.”

He also recommended increasing the penalties and enforcement for bad behavior by investment advisers and registered representatives.

“Not all riders are doping,” was the comparison Geoffrey Wilwerding, a senior portfolio manager with of UBS Financial Services, made to the Tour de France.

“There are so many rules and regulations in place as it is right now that any idiot broker who tries to churn a small account gets stopped in his or her tracks almost immediately at the firm level,” he wrote. “Yes, a big fat commission can be a motivator for some brokers, but the notion that brokers recommend investment products or securities that are not suitable and too expensive is really baseless.”

John Signorotti, a 31-year veteran of the advisory business, urged financial education for investors.

“The concept of a rule which protects investors from unscrupulous advisers is a sound one. However, in creating the rule I believe the Labor Department went beyond the scope of protecting investors from the minority of ‘bad’ financial advisers by over-burdening ‘good’ financial advisers.”
Herbert Morgan, Registered Investment Advisor, Efficient Market Advisors

“Often the professional advisor simply has to save investors from themselves,” he wrote. “Along these lines is the issue of "no load" products. Almost 100 percent of clients think ‘no load’ means free. They nearly always believe that ‘load’ has to do with fees or commissions.  They actually think [big firms] firms work entirely for free.”

Among his recommendations: that every product have a professional advice fee of 1 percent; outlawing the load industry; and robo-advisers must charge 1 percent professional advice fee whether or not a live human is involved.

Also: no product should have a fee greater than 1 percent; all professional advisors must at a minimum possess a four-year degree from an accredited college; and all professionals must do, at a minimum, 30 continuing education hours every two years.

The waivers offered by the Labor Department rule, another commenter stated, offer “little protection from the lawyers looking to litigate anything for a quick settlement regardless of how much they put their clients’ interests above everything else.”

“The rule was written by lawyers for lawyers,” he added. “I am not worried about a client complaint about my long-standing service to them but how do you protect yourself from frivolous law suits and the legal fees that you will incur. Even if you win, the legal fees will consume your business.” 

“Advisors should always put their clients’ interests ahead of their own. However, the DOL's Fiduciary Rule is a mess and does nothing to help investors (large or small) or advisors (or planners or whatever we are calling ourselves today),” wrote Robert Ramos, managing partner and financial advisor with Maryland-based Wealth Management Partners.

“Having the Labor Department manage a fiduciary rule that applies only to IRAs is like asking the FBI to manage speed limits,” he added. “One may be able to make the technical argument that the agency has jurisdiction, but the agency doesn't have the experience or knowledge base to create/manage the rule, nor does it have the systems or personnel in place to enforce or manage the rules.”

One comment letter said the SEC should preserve the current system with some suggested guidelines. Rather than label advisers, all covered persons should be labeled fiduciary (fee-based) or brokerage. If an advisor wants to become licensed in one or both, that is their choice.

The SEC should also make a general best-interests rule that accommodates investors by allowing fiduciary, brokerage and insurance products. “The rules can be written to protect consumers by clearly labeling whether a product is a fiduciary or brokerage,” he added. “The SEC can further protect consumers by increased disclosures, clearer labels on fees, banning of kick-backs and other similar protections.”

Another party emerges

As the SEC continues to sift through incoming comment letters, the CFP Board, which sets and enforces standards for the Certified Financial Planner certification granted to more than 76,000 personal financial planning professionals in the United States, has entered the fray.


The following is an excerpt from “Policy Priorities of CFA Institute Members,” as submitted to the Securities and Exchange Commission.
Fiduciary obligations of investment professionals.
CFA Institute strongly supports a fiduciary standard for all who provide personalized investment advice to retail investors. We are acutely aware of the difficulty the Commission faces in attempting to draft a uniform standard for everyone providing such advice, as it would likely involve numerous exemptions and carve-outs for different types of clients, transactions, and situations.
We believe the Commission can effectively begin to regain control of this issue by regulating the titles that those who provide personalized investment advice can use. We, like the Commission’s Investor Advisory Committee, recommend that the Commission require that anyone wishing to refer to their title and/or activities as advisory in nature (“adviser” or “advisor”) adhere to the Investment Advisers Act and the fiduciary duty implied by common law interpretation of the Act. Such control of terminology would not be new to the Advisers Act, which already expressly limits use of the term “investment counsel” to those who must adhere to the Advisers Act’s requirements.
At the same time, we believe commission-based sales activities serve important client needs and give investors options for how they wish to conduct their investment activities.
Whether commissioned brokers provide investment ideas or execute trades, we support that they be permitted to pursue their business activities, so long as they are clear about their roles vis-à-vis their clients. Specifically, we recommend that the Commission require that they refer to their roles with the title, “salespersons.”
We believe that once the issue of titles is addressed, the SEC will have a clearer idea of what kind of rules are needed to address other aspects of the standards-of- care issue.
Risk and fee disclosures for investment products and services
The expansion of investment products into more complex collective investment funds and services has brought a parallel need for improved disclosures. The two areas our members say need the greatest improvements are related to fees/costs and risks.
The cost of investment products and fees for services are often spread across an array of potentially confusing terms, from management and transfer agent fees to so-called 12b-1 fees, not to mention transaction, custody and legal costs, among others.
We believe investors deserve to understand what these costs are, how much they are, and most importantly how they will affect their ultimate investment outcomes. Unless investors are aware of these costs and understand how they affect their returns, they cannot appropriately compare and contrast different investment products and may lose trust in the investment sector and in the financial markets, in general.
To help allay these concerns, we recommend that the Commission launch a review the required fee disclosures for investment funds and advisers with a goal of ensuring they are comprehensive and understandable, and convey how these costs affect investors’ ultimate investment outcomes.
We recommend that the Commission review its existing risk disclosure requirements with a goal of enhancing the quality of such disclosures across the spectrum of investment products. We believe doing so will enable investors and their advisers to make truly informed decisions, and we are prepared to offer investors’ views to the Commission as part of its review.
Regulation of investment products and services deploying financial technologies
Regulation of investment products and services deploying financial technologies
In early 2016, CFA Institute surveyed its membership to gauge the degree of angst or comfort they held for emerging financial technologies, such as automated advisers (such ads, robo advisers).
In general, our members saw these technologies providing important investment services to investors who have limited assets to manage. They also saw the technologies as offering access to a wider range of investment products and services than these clients would normally see.
At the same time, members saw risks in the new technology-based products and services that could pose greater challenges for regulators and investors, alike.
To prevent unnecessary investor losses, both for those investing through automated platforms and for investors in the firms offering these platforms, we urge the Commission to step up its examination and enforcement of existing adviser regulations as they apply to automated advisory firms.
At the same time, we recommend that the SEC clarify for these firms that they are subject to the same client-loyalty requirements that apply to traditional advisers.
To enable the Commission to invest in systems and people needed to provide this kind of oversight and enforcement, we will advocate for greater appropriations for the Commission.
Source: CFA Institute

On June 20, it issued a request for public comment on proposed revisions to its Standards of Professional Conduct.

The draft revision broadens the application of the fiduciary standard, effectively requiring CFP certified professionals to put a client’s interest first always. A 60-day comment period on the plan ends Aug. 21.

Since the definition of financial advice is broader than the definition of financial planning, the draft also expands the commitment that all CFP professionals make to acting in their client’s best interest.

The proposal presents a new definition of financial planning that is intended to be brief and comprehensive. Financial planning is defined as “a collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.”

There would also be requirements for a consolidated, easier-to-read document for the public and CFP professionals.

Into the unknown

In her assessment, Andrea McGrew, chief compliance officer for USA Financial, says the difficulty in adapting to the fiduciary rule is the uncertainty that surrounds it.

“We are locked into this gray area of questioning whether we are doing enough because we want to make sure we are doing everything as best we can,” she explains. This limbo, where things are up in the air, is the frustrating part… Even though the requirements were relaxed, it was still a lot of work because we had to fundamentally shift the way we were doing business in some areas. That was a big undertaking for a lot of financial advisers.”

A few bad apples ruin it for everybody else, McGrew adds. “You have a lot of financial advisers who are really trying, and always have been looking out for their clients’ best interests. Then this rule comes out and says, ‘Well, even if you were, we are going to have to fundamentally alter how you do your business, changing contracts, the type of products you sell, and the types of disclosures you use.’ The paperwork you need to give to a client is going to increase tenfold.”

The CFP Board’s expansive application of fiduciary duty provides even more food for thought, especially regarding disclosures on the managing, and mitigating of conflicts of interest which, in its transition period, the Labor Department pulled off the table.

“We don’t need to have the website disclosures right now,” McGrew says. “We don’t have to have the contracts that lay out the various conflicts. It will be interesting to see what happens when the Labor Department rule gets issued. If they roll that rule back, we could potentially have a bifurcated standard.”

“Complying with these standards will fall onto those with CFP certifications themselves, but they are going to be looking to compliance departments for help,” she ads.

In its comment letter to the SEC, CFA Institute, the global association of investment professionals, offers its own list of fiduciary-related priorities:

Regulate titles to ensure fiduciary obligation: Recommend anyone who refers to their title and/or activities as advisory in nature adhere to the Investment Advisers Act and fiduciary duty. Commission-based brokers providing investment ideas or trades should refer to themselves as “salespeople.”

Improve risk and fee disclosures: Review the existing risk disclosure requirements with a goal of enhancing the quality, so that investors and advisors can make more informed decisions.

Regulate financial technologies: Step up the examination and enforcement of existing adviser regulations to automated advisory firms and subject these technologies to the same client-loyalty requirements that apply to traditional advisers.

Increase focus on cyber-security: Dedicate financial and human resources to cyber-security efforts, further reinforcing oversight and regulation of U.S. capital markets and addressing market anxiety about the threat of cyber-security breaches.

Continue overseeing non-GAAP financial measures: robust regulatory oversight to increase the transparency and comparability of non-GAAP reporting and reduce the likelihood that these measures will mislead investors is critical.

Research by the SEC, dating back to just before the financial crisis, shows that investors were confused about what the role of the person they were working with was. Little has been done to fix that problem, says Jim Allen, head of capital markets policy for CFA Institute.

Regulating job titles to ensure the clarify of roles is a deceptively simple step.

“What’s their motivation? The term adviser has a connotation,” Allen says. “It has a connotation that they have a higher calling than a salesperson. With a salesperson you know they are trying to sell you something. Whereas, if someone tells you they are there to advise you on how you should invest your retirement portfolio, that’s when you ask whether you should follow their advice.”

While some say that even a half-page disclosure could clear up most confusion, Allen has other thoughts. “The simplest thing you can do is to simply say what your motivations are,” he says. “Are you an adviser or are you a salesperson? Tell us one way or the other and then investors will at least have a chance of understanding where you are coming from. They can start asking questions that maybe they didn’t know they needed to ask.”

“It may not be the final step but it is certainly an important first step,” he adds. “My guess is that once you have that taken care of you probably have taken care of a significant part of the problem.”

Improving risk and fee disclosures is also crucial. “We need to make it so that those disclosures are not only there, but also understandable,” Allen says. “Legalese is not understandable.”