Letters

Aug 16, 2009 @ 12:01 am

Large number of advisers do act as fiduciaries

I enjoyed the Other Voices column in the July 20 issue, “What, exactly, does fiduciary really mean?” by Janice J. Sackley, a fiduciary bank risk manager in Kalamazoo, Mich.

Her views and recommendations are the most well-thought-out of all the views I have heard on the topic, and I strongly endorse her concept of placing investment professionals in one of three camps.

In spite of my extremely favorable reaction to her views, there are a couple of points that I think do need clarification.

First, the article seems to ignore that there are many financial advisers who already do act as a fiduciary in the full sense of the word. They use unaffiliated custodians and obtain client consent before using those custodians.

Second, from my perspective, it doesn't appear that corporate trustees always act in the best interests of their clients. Usually, trust documents prepared with input from corporate trustees make it very difficult for the beneficiary to change trustees.

In my judgment, that is done more for the benefit of the corporate trustee than for the client.

With those minor caveats, I think both the industry and consumers would benefit if the Securities and Exchange Commission adopted and embraced Ms. Sackley's recommendations.

John W. Eckel

President

Pinnacle Investment Management Inc.

Simsbury, Conn.

Advisers increasingly see the wisdom of annuities

Charles J. Farrell's analysis of the value of retirement in his On Retirement column, “Protecting retirement assets from rising taxes,” which appeared on InvestmentNews.com on July 15, overlooks several key points.

Lifetime annuities provide guaranteed income that won't fluctuate due to market conditions. Mr. Farrell argues that retirees can rely on past market performance when choosing between guaranteed income and withdrawals from a non-guaranteed investment portfolio.

As demonstrated over the past six months, past performance does not ensure that the markets will, in the near future or the longer run, match the income guaranty of a forgone annuity.

Moreover, when deciding be-tween guaranteed income or some other approach, retirees need to determine whether, over the course of their retirement, they are in a position to manage their own investment portfolios, or pay substantial management fees, and whether they can withstand dramatic decreases in monthly income.

Mr. Farrell's suggestion does nothing to address longevity risk. Indeed, as he acknowledges, retirees who follow his suggestions will be rolling the dice — in effect expecting to die before their assets run out or the market tanks. This is a poor strategy for elderly retirees who have no opportunities for future income.

In research titled “Taxing Retirement Income: The Case of Non-Qualified Retirement Annuities,” Jeffrey R. Brown, an economist at the University of Illinois at Urbana-Champaign, demonstrates that no other investment-and-withdrawal method provides retirees with better economic results than a lifetime annuity.

In the wake of the economic crisis, more and more financial advisers are seeing the wisdom of annuities and their guarantees of lifetime income.

Frank Keating

President and chief executive

American Council of Life Insurers

Washington

SIFMA wants to weaken fiduciary standards

On July 17, Randolph Snook, executive vice president of the Securities Industry and Financial Markets Association, in testimony before the House Financial Services Committee, said that the organization supports “a new federal fiduciary standard of care that supersedes and improves upon the existing fiduciary standards, which have been unevenly developed and applied over the years, and which are susceptible to multiple and differing definitions and interpretations under existing federal and state law ... A new federal standard should also protect investors by respecting and preserving ... in-vestor choice to define or modify relationships with their financial services provider based on the investor's preference.”

This statement is the latest of many by New York- and Washington-based SIFMA in which it attacks today's fiduciary standard — the highest standard under the law — in an attempt to foster regulatory change, but not regulatory improvement.

Are fiduciary standards for pro-viders of investment advice outmoded, unfair or confusing? No. Fiduciary law has evolved over -several centuries, but it hasn't fundamentally changed since the en-actment of the Investment Advisers Act of 1940.

The major fiduciary duties of due care, loyalty and utmost good faith form part of an established body of law from which can be discerned specific rules of conduct for investment advisers and financial planners. Contrary to SIFMA's assertions, fiduciary law is, and has been for many decades, very well-defined.

Specific rules can be discerned to guide the conduct of investment advisers and financial planners, as well as others in relationships of trust and confidence. SIFMA may be confused, but true fiduciary law isn't.

If SIFMA were to delve deeper, it would find a commonality between fiduciary law and federal securities law as to the requirement to disclose certain material facts.

But true fiduciary law goes much further and requires that even the disclosure of a conflict of interest doesn't permit the fiduciary to act in a manner contrary to the best interests of the client.

The entire purpose of disclosure under fiduciary law is to seek the informed consent of the client, and no such consent would exist for a proposed action which would harm the client.

In essence, fiduciary law requires that unavoidable conflicts of interest be managed so as to keep the best interests of the client paramount at all times. This is the standard of conduct SIFMA's member firms seek to avoid.

It must be recognized that disclosures alone in this complex financial world are clearly inadequate to protect consumers. Clients of financial advisers rarely read disclosures and even less frequently understand them.

Moreover, there now exists substantial academic research demonstrating not only that individual consumers possess substantial behavioral biases that inhibit the effectiveness of disclosures but also that financial intermediaries are trained to take advantage of these consumer weaknesses.

Blanket waivers of fiduciary protections by the client, as SIFMA suggests be permitted to occur, are contrary to fiduciary law.

Fiduciary status is imposed by law upon the trusted adviser precisely because the consumer lacks sufficient protection through disclosures.

Rather than permit the party in a position of superior knowledge and power to dictate the terms of the relationship and the adviser's standard of conduct as may occur when an unsuspecting client signs new account forms, fiduciary law protects the client by prohibiting such attempts to weaken fiduciary duties broadly.

At all times, the fiduciary is bound to act as a trusted adviser to the client, and nothing less.

It would be grossly unfair to consumers to enact legislation that would call a standard of conduct a fiduciary one when it is anything but. It would also be unfair to permit financial firms to hold themselves out as trusted advisers if those same firms don't accept the restrictions on their conduct and compensation practices that true fiduciary standards require.

In truth, SIFMA desires not to strengthen fiduciary standards but rather to weaken them to the much lower standards of conduct found in arm's-length relationships in which caveat emptor prevails and the consumer can't trust his or her adviser.

Ron A. Rhoades

Chief compliance officer

Joseph Capital Management LLC

Hernando, Fla.

'Fiduciary' is a question of function, not form

The Other Voices column in the July 20 issue “What, exactly, does fiduciary really mean?” by Janice J. Sackley, a fiduciary bank risk manager in Kalamazoo, Mich., makes an interesting contribution to the debate about fiduciary responsibility in that it highlights the confusion that exists not only among members of the public but among financial professionals as well.

For example, she suggests that “the SEC should raise its [registered investment adviser] standard to a true fiduciary standard” and that “the bottom line is that a true fiduciary standard isn't required of RIAs.”

The reality is that there exists a strong body of law and legal opinion as to what constitutes a fiduciary standard that, in its simplest form, imposes fiduciary status on anyone who is acting in a position of trust for the benefit of another.

Thus, anyone who gives investment advice and receives compensation will be considered a fiduciary, irrespective of professional designation. It is a question of function, not form.

Hopefully, if new legislation is crafted, Congress will recognize that it isn't in the public's interests to modify the existing fiduciary standard to suit the needs of the financial services industry but to require those elements within the industry that resist fiduciary status to modify their practices to suit the needs of the public.

Roger Levy

Chief executive

Scottsdale, Ariz.

Cambridge Fiduciary Services LLC

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