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.”

Financial Planning Coalition Statement on FINRA Investor Protection Survey

The Financial Planning Coalition issued the following statement regarding a recent FINRA survey that confirms the findings from original research conducted by the Financial Planning Coalition. Both FINRA and the Coalition’s findings indicate that investors support more government oversight of investment advisers and appropriate regulation to safeguard themselves from adviser misconduct.

“The Financial Planning Coalition urges Congressional leaders to make investor protection and the provision of ethical financial advice priorities in 2015. Providing the Securities and Exchange Commission’s (SEC) with the funding it needs to fill dangerous gaps in investment adviser oversight should be Congress’ first order of business. In the absence of this increased funding, however, Congress should pass bipartisan legislation authorizing the SEC to collect user fees from registered investment advisers in order to increase the alarmingly low frequency of examinations.”

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

Amid Surge in Demand for Financial Planners, Consumers Are Harmed by Lack of Appropriate Regulatory Standards

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) – today released a white paper featuring comprehensive quantitative and qualitative research shining a light on the insufficient regulatory standards for financial planners. Drawing on both new research and analysis of existing industry data, the Coalition concludes that consumers are harmed by the lack of appropriate regulatory standards for those who hold themselves out as “financial planners,” but provide narrowly focused advice, single-product solutions, or advice that is not in the consumers’ best interest.

The Coalition’s research and analysis is a comprehensive response to the 2011 Government Accountability Office (GAO) study regarding oversight of financial planners and the professional designations they use to market themselves to consumers. The GAO concluded that no additional regulation specific to financial planners was warranted at the time.

“When the GAO conducted its study of gaps in the regulation of financial planners, it operated under an aggressive, Congressionally-mandated timeline that provided little opportunity to conduct the necessary original research to thoroughly address the issue,” said the Coalition. “Now, however, combining our research with an analysis of industry data not available in 2011, it becomes clear that common sense regulatory standards for financial planners are needed to protect consumers.”

As millions of “Baby Boomers” head toward retirement, consumer demand for competent, ethical, and integrated financial planning advice is surging. The current regulatory framework, however, takes a piecemeal approach and is weakened by significant regulatory gaps at the federal and state levels. Such a regulatory framework that only protects consumers in limited circumstances and during limited timeframes does little to instill public confidence in an arena dominated by confusing titles and those who profit from using them.

Financial service providers are free to hold themselves out as “financial planners,” but only provide more narrowly focused advice to consumers, such as investment, securities, or insurance services. Consumers need and expect financial planners to provide competent, holistic advice that takes into account the impact of that advice across a broad range of financial subjects (retirement, investment, tax, insurance, education, and estate planning) and is provided under a fiduciary standard of care.

There currently is no uniform regulation that imposes rigorous competency and ethics standards on those offering financial planning advice to consumers. One state securities regulator, highlighting this disparity, remarked, “[We] can suspend brokerage licenses right and left, but there’s nothing to prevent these people from turning around and becoming financial planners.”

The absence of comprehensive regulatory standards harms consumers because it prevents them from being able to identify competent and ethical financial planners. For example, according to new research conducted by Fondulas Strategic Research on behalf of the Coalition, there is significant consumer confusion about the various titles associated with financial planning. The research shows that 82 percent of consumers believe that a financial planner is the same as a “financial advisor;” 70 percent believe a financial planner is the same as a “wealth manager;” and 68 percent believe a financial planner is the same as an “investment advisor.”

Given this confusion, consumers who are seeking financial planning services are unable to identify true financial planners and face the real risk they will not receive the services they seek. The Fondulas research found that approximately one-third of consumers who worked with an advisor on a financial plan did not receive the financial planning services they were seeking:

  • 31 percent received two or fewer services as part of their financial plan,
  • 30 percent believe they did not get the services they needed, and
  • 27 percent wanted a financial plan but did not get one.

Consumers are also harmed when those who identify themselves as financial planners fail to provide the financial planning services requested. Data from Cerulli Associates, a leading industry research firm, reveal that in 2013, over 166,000 financial advisors self-identified as members of a financial planning focused practice. Cerulli then verified the practice type by analyzing additional data, and determined that only 38 percent of the self-identified financial planners actually had financial planning focused practices. In other words, over 100,000 financial advisors incorrectly self-identified as being part of a financial planning practice. This gap continues to exist and shows no sign of abating.

The Cerulli data also highlight the significant financial incentives that encourage many professionals to identify and to market themselves as financial planners, including their belief that advertising financial planning services:

  • Increases asset retention (87 percent agree),
  • Increases assets under management (83 percent agree),
  • Generates greater revenues per client (76 percent agree), and
  • Creates additional cross-selling opportunities (71 percent agree).

Although these findings show that consumers seeking financial planning services have difficulty finding a true financial planner and do not receive the services they seek, there is positive news.  Additional Fondulas research found that those who work with CFP® professionals – financial planners who have met rigorous competency standards and who have agreed to comply with strict ethical standards – had higher levels of satisfaction, were more likely to say they received a plan with realistic financial goals, and were more likely to feel their financial needs and objectives were addressed.

“American consumers looking for financial planning services face an uphill battle when it comes to identifying a competent, ethical financial planner, and are harmed by the lack of appropriate regulatory standards,” said the Coalition. “Just as consumers expect a medical doctor to have a M.D., a lawyer – a J.D., an accountant – a CPA, they should expect their financial planner to demonstrate expertise, experience, and accountability, and be held to standards the public can understand and trust, as with the CFP® certification.”

For additional information on the Coalition’s research and analysis, please see the white paper, “Consumers Are Confused and Harmed,” as well as a two-page graphic summary of key findings.

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Research Methodology

Fondulas Research

In 2013 and 2014, Fondulas Strategic Research conducted a quantitative, online survey of 1,250 consumers from across the U.S. on behalf of the Financial Planning Coalition. To qualify for the survey, consumers were required to be age 25 or older, make or contribute to decisions about household finances, and have a household income of $50,000 or higher. Included in the sample were 496 consumers who have worked with a financial professional in the past five years on one or more financial services goals and 250 consumers who could name the financial professional they worked with. From October 28 to November 11, 2013, Fondulas subsequently conducted interviews with the 496 consumers. Once interviews were completed, Fondulas independently verified the designations for the financial professionals named through online searches and phone calls.

Cerulli Associates Research

Cerulli Associates (CA) conducts the Cerulli Advisor Metrics Reports, an annual series of ongoing research and analysis of the advisor marketplace. The reports focus on advisor trends and consumer information, including market sizing, advisor product use and preferences, and advice delivery. The 2013 Advisor Metrics Report leverages CA’s continuous research and analysis of the marketplace, including proprietary surveys of more than 50 broker/dealers and more than 100 asset managers. In addition, the 2013 report relies heavily on CA’s growing database of advisor surveys, which includes more than 8,000 individual advisor responses to CA’s surveys. The proprietary data in the 2013 Advisor Metrics report is supplemented with government sources (Federal Deposit Insurance Corporation, Federal Reserve, Department of Labor, etc.), as well as third-party sources (Strategic Insight, Morningstar, etc.). CA obtained financial planner data by asking advisors participating in its annual survey to classify their practices – as money managers, investment planners, financial planners, or wealth managers – based on their perception of the services they offer. CA then reviewed the actual services offered (data also obtained through surveys) and the client base of each advisor to determine which classification best reflects the advisor’s actual practice.

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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