Author Archives: Carolyn Sofman

Ahead of SEC Chair’s Expected Announcement on Fiduciary Standard Rulemaking, Pro-Fiduciary Groups Advocate for Economic Analysis that Supports Strong, Pro-Investor Rule

A group of organizations advocating for the Securities and Exchange Commission (SEC) to move forward with a rulemaking that would extend the fiduciary standard to broker-dealers providing retail investment advice have called on SEC Chair Mary Jo White to ensure that the Commission’s economic analysis will be “well-reasoned” and “lay the groundwork for a strong, pro-investor policy.”

The letter, which outlines key elements the economic analysis must include to achieve that goal, is signed by the Consumer Federation of America, Fund Democracy, Inc., Certified Financial Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors.

A copy of the letter, which was delivered to the SEC on Friday, November 21, can be accessed here.

In releasing the letter, the group also made this statement:

“We have all long advocated for a uniform fiduciary standard that would, consistent with Section 913 of the Dodd-Frank Act, apply to broker-dealers when they offer personalized investment advice to retail investors. With this letter, we want to make it perfectly clear that we believe a thorough, well-reasoned economic analysis will offer strong support for rulemaking.

“Past actions – and inaction – by the Commission have permitted broker-dealers to misrepresent themselves to the public as advisers without requiring them to meet the fiduciary standard that is appropriate to that role, and unsuspecting investors have been harmed as a result.

“It is time for the SEC to develop a rational, pro-investor policy for the regulation of financial professionals. Toward that end, we urge the Commission to follow the staff recommendation made nearly four years ago and move forward with a rulemaking.

“American Investors deserve to have their interests put first and adoption of a uniform fiduciary standard would immeasurably improve investor protection. Investors should not have to wait any longer to get the protection they expect and deserve.”

Washington Post: Find a Financial Adviser Who Will Put Your Interests First

Financial adviser and columnist Barry Ritholtz urges consumers to look for and hire a financial adviser who is legally obligated to put the client’s interest first under a fiduciary standard in his latest article for The Washington Post.

Excerpt: Today’s column is going to be on the wonky side, but stay with me — it is very important stuff. For investors seeking some help, it can be crucial.

If you want financial advice, there are two things you should be aware of: First, the quality of advice you receive varies widely. You probably knew this already. The quality of everything you buy varies widely. It is as true for financial advice as it is for any product or service you may buy or otherwise consume. You can buy a Yugo or a Mercedes-Benz. They may both be automobiles, but they vary dramatically.

Regardless, everywhere these cars are sold, they each must meet the same government rules. Safety regulations, crash worthiness standards, fuel economy, consumer warranties, etc., apply equally to both vehicles.

This is decidedly not true of the people who provide you with financial advice. So we come to the second point: There are two completely different standards for these people — they are governed by two wholly different sets of regulations. The two standards are “suitability” and “fiduciary.”

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Coalition Research Featured in Investment News, Think Advisor, Financial Advisor

The Financial Planning Coalition’s research on the current insufficient regulatory standards for financial planners was featured in reports by Mark Schoeff at Investment News, Emily Zulz at Think Advisor, and Karen DeMasters at Financial Advisor.  Click through to read more.

Financial planning clients not getting what they pay for: study
Investment News
October 20, 2014
By Mark Schoeff Jr.

Third of Clients Say They Didn’t Get Adequate Financial Planning Services
Think Advisor
October 20, 2014
By Emily Zulz

Financial Planning Profession Needs More Regulation, Group Says
Financial Advisor
October 20, 2014
By Karen DeMasters

The New York Times: Before the Advice, Check Out the Advisor

The New York Times’ Tara Siegel-Bernard examines the important role of fiduciary standard, how it differs from a suitability standard, and what to look for when it comes to both standards when hiring a financial advisor.

Excerpt: When Elaine and Merlin Toffel, a retired couple in their 70s, needed help with their investments, they went to their local U.S. Bank branch. The tellers knew them by their first names. They were comfortable there.

So when a teller suggested that they meet with the bank’s investment brokers, the Toffels made an appointment. After discussions and an evaluation, the bank sold them variable annuities, in which they invested more than $650,000. The annuities promised to generate lifetime income payments.

“We wanted to make the most amount of interest we could so if we needed it to live on, we could use it,” said Ms. Toffel, 74, of Lindenhurst, Ill.

What she says they didn’t fully understand was that the variable annuities came with a hefty annual charge: about 4 percent of the amount invested. That’s more than $26,000, annually — enough to buy a new Honda sedan every year. What’s more, if they needed to tap the money right away, there would be a 7 percent surrender charge, or more than $45,000.

Michael Walsh, a spokesman for U.S. Bank, said that the investments were appropriate for the Toffels, that fees were disclosed and that the sale was completed after months of consultations. But the Toffels now question whether they were given financial advice that was truly in their best interests. Like many consumers, they say they didn’t realize that their broker wasn’t required to follow the most stringent requirement for financial professionals, known as the fiduciary standard. It amounts to this: providing advice that is always 100 percent in the consumer’s interest.

Many people think that they are getting that kind of advice when they are not, said Arthur Laby, a professor at the Rutgers School of Law and a former assistant general counsel at the Securities and Exchange Commission. “Brokerage customers are, in a certain sense, deceived,” he said. “If brokers continue to call themselves advisers and advertise advisory services, customers believe they are receiving objective advice that is in their best interest. In many cases, however, they are not.”

Brokers, like those at the Toffels’ bank, are technically known as registered representatives. They are required only to recommend “suitable” investments based on an investor’s personal situation — their age, investment goals, time horizon and appetite for risk, among other things. “Suitable” may sound like an adequate standard, but there’s a hitch: It can mean that a broker isn’t required to put a customer’s interests before his own.

There are some specific situations when brokers must act as fiduciaries — for example, when they collect a percentage of total assets to manage an investment account, or when they are given full control of an investor’s account. But under current rules, a broker can take off his fiduciary hat and recommend merely “suitable” investments for the same customer’s other buckets of money. Confusing? Absolutely.

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SEC Investor Advocate Makes Case for User Fees

This week, Rick Fleming, the SEC’s Investor Advocate, delivered a speech at the Southwest Securities Conference in Dallas, Texas.  In his remarks, Fleming described the newly created Office of the Investor Advocate, created under the Dodd-Frank Act, and the core issues impacting investors that the office will focus on during its inaugural year.  In addition, Fleming acknowledged the need to provide the SEC with sufficient funding to “conduct an adequate number of investment adviser examinations,” going so far as to recommend Congress authorize the SEC to collect user fees as a long-term solution to funding RIA examinations.  The following is an excerpt from his speech, the full text of which can be found here.

“As many of you are aware, the SEC examined only about 9 percent of registered investment advisers in Fiscal Year 2013. This equates to a frequency of approximately once every 11 years, a rate that many observers find unacceptable.

“There are multiple reasons for the lack of exam coverage, but in my view it primarily boils down to the fact that the SEC has not received sufficient resources to keep up with the burgeoning workload. The number of SEC-registered advisers has grown by approximately 40 percent over the past decade to nearly 11,500 today. And, as the number of investment advisers has grown, so too has their complexity. The amount of assets managed by investment advisers is on a steep ascent, climbing from $20 trillion a decade ago to an estimated $55 trillion by the end of Fiscal Year 2015. In comparison, staff in the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has grown only about 10 percent in the past decade.

“From my own personal experience, I know that investors are exposed to fraud and abuse when regulators cannot maintain an adequate regulatory presence. While most investment advisers are trustworthy and honest, I have personally prosecuted one who stole more than $7 million from his clients. In the course of that case, I met with numerous victims who did everything right – they worked hard, saved their money, and entrusted their savings to a licensed person who they thought was investing it in a normal portfolio of legitimate securities – only to have their life savings taken by that licensed “professional.” For those investors, an ounce of prevention would have been worth far more than the pound of cure. With their money gone, a maximum prison sentence did little to help those retirees who had to return to work or face a diminished standard of living, or the individual with diminished capacity whose trust fund was stolen, or the church that lost its building fund.

“Not surprisingly, then, as my very first recommendation to Congress, I recommended that Congress appropriate the needed funds this year so that the Commission can hire more examiners without further delay. In addition, I voiced support for a more long-term, sustainable solution. I recommended that Congress authorize the SEC to collect an annual “user fee” from registered investment advisers and to limit the use of those funds to expenses associated with investment adviser examinations.

“Admittedly, a shorter examination cycle won’t stop all fraud, but I believe it will allow the SEC to halt these types of activities sooner and will provide a stronger deterrent to advisers who might otherwise succumb to the temptation to steal. It will also curtail other unethical practices, including excessive fees, excessive trading, and undisclosed conflicts of interest. Many of you in this room have uncovered these types of practices and can attest to the damage it causes to investors.”

Four Years After Dodd-Frank, Uniform Fiduciary Standard Still Urgently Needed

Washington, D.C. – The Financial Planning Coalition – comprising Certified Financial Planner Board of Standards, Inc. (CFP Board), the Financial Planning Association® (FPA®) and the National Association of Personal Financial Advisors (NAPFA) – issued the following statement on the fourth anniversary of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act:

“The Dodd-Frank Act was born out of the financial crisis, and one of its central goals was to protect American consumers against the excesses of the financial services industry. Yet, four years after Dodd-Frank’s passage, the Securities and Exchange Commission (SEC) has neither proposed nor adopted a uniform fiduciary standard – a fundamental and much-needed protection for American consumers who rely upon broker dealers for financial advice and information. Section 913 of Dodd-Frank granted the SEC the authority to extend this critical investor protection.

“To make matters worse for consumers, the U.S. House of Representatives recently approved an amendment to the FY 2015 budget that prohibits the SEC from using any of the appropriated funding to adopt a fiduciary standard. This amendment would guarantee investors remain exposed to significant and unjustifiable harm, including higher costs, poorer performance and substandard products too often not in the investor’s best interest.

“The Financial Planning Coalition urges the Senate to reject this anti-investor amendment –which guts an important part of Dodd-Frank – and renews its call for the SEC to protect investors by adopting a uniform fiduciary standard for broker-dealers that is no less stringent than the existing standard for investment advisers. Such a requirement is long overdue.”

Financial Planning Coalition research shows that American consumers want the federal government to play an active role in protecting investors, including through the adoption of a fiduciary standard. In fact, in response to a 2013 survey,93 percent of respondents said that they agree with the statement that financial advisers providing advice “should put your interests ahead of theirs and should have to tell you upfront about any conflicts of interest that potentially could influence that advice” – the very definition of the fiduciary standard.