Round Table: Regulation - Financial advisory industry at odds over Rand report

No meeting of the minds on how far to extend fiduciary duties

Mar 10, 2008 @ 12:01 am

By Sara Hansard

<b>Round-table panelists (l-r):</b> Karen Tyler, Ira Hammerman, Ron Rhoades, Duane Thompson, David Strege, David Bellaire.
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Round-table panelists (l-r): Karen Tyler, Ira Hammerman, Ron Rhoades, Duane Thompson, David Strege, David Bellaire.
Representatives from the brokerage community and the investment advisory industry disagree about the need for all financial advisers to be regulated as fiduciaries. This was one of the findings of the annual InvestmentNews regulatory round table, held in Washington on Feb. 20, which centered on the financial advisory industry's reaction to a study commissioned by the SEC and conducted by the Rand Corp. of Santa Monica, Calif. The preliminary report, which was released in January, addressed the legal and regulatory environment faced by investment advisers and broker-dealers and whether investors understood the differences between the two channels and their obligations to investors. A key issue was whether all providers of advice — whether registered representatives or registered investment advisers — should be held to the same fiduciary standard. Under such a standard, advisers must put a client's best interests above all else. "I'm not sure that a fiduciary standard is appropriate in all situations," said David Bellaire, general counsel and director of government affairs for the Financial Services Institute Inc. of Atlanta.

"Investors come in different shapes, sizes and needs," said Ira Hammerman, senior managing director and general counsel for the Securities Industry and Financial Markets Association, which has offices in New York and Washington. For example, investors who have concentrated stock positions in the companies for which they work may not want to diversify their holdings, he said. "That notion might be entirely inconsistent with the fiduciary duty standard, which would require diversification, said Mr. Hammerman. "So then you are going to run into the problem of either the fiduciary having to fire the client ... or you are going to have to negotiate one-on-one contracts with every customer on what is covered by the relationship and what is not."

While acting as a fiduciary entails more liability for financial advisers, "it is clearly a higher standard," argued Duane Thompson, managing director of the Washington office of the Denver-based Financial Planning Association. "It creates more liability for the firm and more protections for the customer. You have to make that choice."

"Perhaps the focus shouldn't be so much on the cost to firms of imposing a fiduciary standard, but the cost to investors," said Ron Rhoades, chief compliance officer with Joseph Capital Management LLC in Hernando, Fla. Mr. Rhoades is a member of the industry issues committee for the National Association of Personal Financial Advisors in Arlington Heights, Ill.


Many clients who come to his firm from brokerage firms have been paying total fees of between 2.5% to 3.5%, he said. "We are able to reduce those costs significantly, often 30% to 70%. That's true for a lot of investment advisers who adhere to the precept that the fiduciary standard ought to be embraced," he said. Round-table participants agreed that a major restructuring of the financial services regulatory system is not necessary to clear up the confusion investors have over the roles of financial service providers, which the report noted. The Securities and Exchange Commission should focus on coming up with disclosures that will give investors a clear understanding of what services they are getting from all segments of the financial services industry, said Mr. Hammerman. The Rand study found that while most investors questioned in a focus group did not understand the main distinctions between investment advisers and broker-dealers, about three-quarters "expressed high levels of satisfaction with their services." "That 75% approval rating is fantastic, regardless of which side of the debate you are on," Mr. Hammerman said. The first rule regulators should follow is "do no harm," he added. "Can there be improvements? Yes. But it's not as broken as some might suggest." In reaction to the demand for investment advice, brokerage representatives have entered the advice business, Mr. Rhoades said. That "is a good thing," he said. "But what I don't like is the fact that they give advice without being held to the same standard of conduct [as investment advisers]. I would characterize the SEC reaction to this as ineffective. They have allowed the use of titles like financial consultant and financial adviser by registered representatives who are not subject to the [Investment] Advisers Act [of 1940] requirements." Better disclosure is not enough to protect investors, said Mr. Rhoades. He pointed to findings in the Rand report that even when differences in regulation between broker-dealers and investment advisers are explained to investors in plain English, investors do not understand the distinction. "The answer is to protect consumers by applying that fiduciary standard of conduct, to always put the client's best interests first and foremost," he said. Mr. Bellaire agreed that it is difficult for investors "to understand arcane legal definitions and their application to the service that they receive." But, while he believes disclosures could be improved, he said that "much of the disclosures ... that I have seen tend to exalt the role of investment advisers while really insulting brokers that provide services to investors." It is essential to maintain a distinction between broker-dealers and investment advisers in order to give investors a choice, because brokers tend to be more willing to work with investors with lower account minimums, Mr. Bellaire added.

What concerns David Strege is that according to the Rand report, 53% of consumers surveyed did not use financial advisers, and many had no plans to ever use an adviser.

Mr. Strege is senior wealth coach at Syverson Strege & Co. of West Des Moines, Iowa, and chairman of the Certified Financial Planning Board of Standards Inc. of Washington.


"What I have observed is a lot of consumers just having apathy," he said. "Part of that is because of the confusion that comes from so much complexity in financial services. We must have regulation in place that imposes action against professionals when they violate that trust so that the consumer has confidence when they go to the professional," said Mr. Strege. Without that, consumers will try to "do it themselves, and they will learn through trial and error, which is a very expensive proposition."

Investors have never had as much at stake as they have today, due to the challenges they face in achieving financial security, commented Karen Tyler, securities commissioner of North Dakota in Bismarck and president of the North American Securities Administrators Association Inc. of Washington. As a result, she said, "the responsibility of regulators to ensure that investors are protected has never been greater than it is today, primarily because so many people are turning to our capital markets to achieve financial security.

"So we are concerned about all this pressure coming in to the idea that there needs to be regulatory change," said Ms. Tyler. "I'm starting to sense that in this debate about broker-dealers' acting as investment advisers, that the focus is shifting away from the protection of investors and more toward business model evolution," she said. The focus should be on what should be done to "fill the gap" in protections between laws and regulations pertaining to brokers and those pertaining to investment advisers, said Ms. Tyler.


"If it walks like an adviser and talks like an adviser and gets paid like an adviser, there is a body of law that exists that should apply and there is a regulatory framework that exists to enforce that law. So a [self-regulatory organization] is not necessary to make that happen," she said.

Another issue addressed at the round table was whether fiduciary duties would be compatible with a temporary SEC rule allowing principal trades to be made in advisory accounts as long as disclosures and certain conditions were met. "To the extent fiduciary duty is applied to traditional brokerage activity, we have to do a more comprehensive review of the principal-trading rule" and move away from the current cumbersome rules requiring trade-by-trade approval, which is impractical in fast-moving markets, Mr. Hammerman said.

Mr. Thompson disagrees. "Just because this restriction was part of the law enacted in 1940 doesn't mean that the conflict of interest has gone away over that time. Self-dealing is a huge red flag for regulators," he said. The SEC needs to study the effect of the temporary rule allowing the trades over the next two years, Mr. Thompson said.

The final version of the Rand report will be released this month.

E-mail Sara Hansard at

To view an edited transcript of the round-table discussion, go to


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