The Battle Has Been Won but What About the War

At BFS, we have built our practice and more importantly, our reputation, by putting client interests first. We have built nice careers from serving our clients without conflicts of interest. Does everyone in my profession practicing as a CPA or CFP® work this way? How about a broker or an insurance agent? No. Do some people see financial planning as a simple way to increase revenues and offer products to clients? Unfortunately, yes. However, comprehensive, financial-planning takes skill, education and time in numerous disciplines and first and foremost is about the client. That is why I am so very pleased with a recent court decision and how it has the potential to put the client first again.

I confess – as a comprehensive, fee-only, financial planner – I am a fiduciary and feel that any person in my field who is serving a client should be one as well. I want every person providing investment advice to be obligated – by professional standards and regulatory and statutory authorities – to focus on the client and not the financial needs of the brokerage firm, insurance company or other firm for whom they work. As an advisor who practices this way, this is how I desire for my competitors to act. Lastly, if I were a client this is what I would expect as well.

However, it seems the SEC doesn’t share my view, and most professionals who give investment advice are not and probably never will be fiduciaries. As such, I felt especially vindicated in May when the DC Circuit Court of Appeals struck down the SEC’s rule that brokers could offer financial advice for a fee without becoming registered investment advisors or living up to fiduciary standards. The court told the SEC that professional advisors can not give their best advice “unless all conflicts of interest between the investment counsel and the client were removed,” and that the major focus of the Investment Advisers Act of 1940 “was to substitute a philosophy of full disclosure for the philosophy of caveat emptor.”

The court went further and said the 1940 Act was created to “safeguard the honest investment advisor against the stigma of the activities of faux professionals who follow fraudulent or deceptive practices.” Brokers have been living under this so called “Merrill Lynch exception” since 1999. So why am I not celebrating? Honestly, I am more worried today than before the decision because the decision made it clear that brokers cross into fiduciary territory simply by charging fees for their advice. A broker-dealer representative under the Act is exempt from RIA registration if that person offers investment advice that is “solely incidental to the conduct of his or her business as a broker or dealer, and who receives no special compensation therefore.” In other words, if the advisor acts solely in a transactional matter, no registration is required. When is the last time you heard someone holding themselves out as an advisor say they were simply completing the transaction vs. providing advice? Take a look at a business card. Does it say “transactional facilitator” or “advisor”?
I’m worried that the court’s ruling has backed the supporters of this business model into a corner. Those who have not been registered and putting clients first, have little choice but to adapt. If these companies decline to register, then they have to turn those asset management accounts into brokerage arrangements and take a blow to their credibility. If they decide to register as investment advisors, then every recommendation will be scrutinized by the courts in light of their conflicts of interest.

Given the changes at hand and the money associated with it, there are bound to be changes but what kind and how severe? That is open to much debate and will play out in the press, Congress and back offices of many firms in the coming months.

In the mean time, advisors should simply take a fiduciary oath to their clients and put their interests first.

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