Will the CFP Board Move the Ball Forward, or Stall Progress Toward a True Profession?

While the Certified Financial Planner Board of Standards, Inc. ("CFP Board") has come a long way in its embrace of the fiduciary standard of conduct, I am concerned that the CFP Board - by not embracing the fiduciary standard fully - may be harming the emergence of the profession of financial planning.  And it may, as well, be misleading consumers.  Permit me to explain both of these conclusions, and suggest a logical evolution it is now time for the CFP Board to embrace.

Dodd-Frank Misses the Point: Those Who Provide Investment and Financial Advice Have Always Been Fiduciaries

To understand the issues discussed in this brief, it is first necessary to review when fiduciary status is obtained under the law.

While much of the recent public debate has been regarding Section 913 of Dodd Frank's, and the SEC's authority thereunder to apply the fiduciary standard existing under the Advisers Act of 1940 to broker-dealers and their registered representatives when they provide "personalized investment advice," there is another body of law which already applies the fiduciary standard in such circumstances.  It is state common law - the accumulation of centuries of court decisions in the United States (and even to the common law of England, adopted by the U.S. at the time of the formation of our country).

It was always recognized, under state common law, that those who provide advice in relationships of trust and confidence are, if fact, fiduciaries.  This is regardless of how the person providing advice is regulated.  This is fundamentally an outcome that flows from agency law - i.e., the scope of the fiduciary relationship is defined by the scope of the services being provided.

Early on both the SEC and the NASD recognized that brokers, when providing advice, were fiduciaries.

For example, in 1942 the SEC summarized a court decision finding that the furnishing of investment advice by a broker was a “fiduciary function.”  The SEC stated:

“In the Stelmack case the evidence showed that the firm obtained lists of holdings from certain customers and then sent to these customers analyses of their securities with recommendations listing securities to be retained, to be disposed of, and to be acquired … The [U.S. Securities and Exchange] Commission held that the conduct of the customers in soliciting the advice of the firm, their obvious expectation that it would act in their best interests, their reliance on its recommendations, and the conduct of the firm in making its advice and services available to them and in soliciting their confidence, pointed strongly to an agency relationship and that the very function of furnishing investment counsel constitutes a fiduciary function.”

1942 SEC Annual Report, p. 15, referring to  In the Matter of Willlam J. Stelmack Corporation, Securities Exchange Act Releases 2992 and 3254.

Even earlier, and shortly the self-regulatory organization for broker-dealers, NASD, was formed, NASD (now FINRA) pronounced that brokers were fiduciaries: “Essentially, a broker or agent is a fiduciary and he thus standards in a position of trust and confidence with respect to his customer or principal.  He must at all times, therefore, think and act as a fiduciary.  He owest his customer or principal complete obedience, complete loyalty, and the exercise of his unbiased interest.  The law will not permit a broker or agent to put himself in a position where he can be influenced by any considerations other than those to the best interests of his customer or principal … A broker may not in any way, nor in any amount, make a secret profit … his commission, if any, for services rendered … under the Rules of the Association must be a fair commission under all the relevant circumstances.” – from The Bulletin, published by the National Association of Securities Dealers, Volume I, Number 2 (June 22, 1940).

Investment advisers are always fiduciaries.  Even early on, shortly after the enactment of the Investment Advisers Act of 1940, it was well known that all investment advisers were bound by broad fiduciary obligations to their clients.  In other words, if you provided advice, you were a fiduciary with respect to the advice provided.

But the Investment Advisers Act of 1940 did NOT - as many now seem to conclude - state that brokers are NOT fiduciaries.  It only prescribed when brokers must register as investment advisers.  It was long recognized that brokers, even though not investment advisers, are fiduciaries with respect to the investment advice they provide.

The state common law - case after case - opines that brokers, when in a confidential relationship with their customer - are fiduciaries.  And it is through the application of this common law that brokers are so often charged with fiduciary status in court cases and arbitration proceedings.  Indeed, it was recently reported that "breach of fiduciary duty" is the most common allegation in FINRA arbitration proceedings.

What is a "Confidential Relation"?

That is not to say that all registered representatives and broker-dealers are fiduciaries, all that time.  Fiduciary status only attaches when they are in a "relationship of trust and confidence."

What is a "confidential relation," for purposes of determining whether fiduciary status attaches?  There are numerous cases in the state courts which explore when a person becomes a fiduciary.  But perhaps thee Supreme Court of Virginia opined as to this definition way back in 1933:

“Confidential relation is not confined to any specific association of the parties; it is one wherein a party is bound to act for the benefit of another, and can take no advantage to himself. It appears when the circumstances make it certain the parties do not deal on equal terms, but, on the one side, there is an overmastering influence, or, on the other, weakness, dependence, or trust, justifiably reposed; in both an unfair advantage is possible.

Trust alone, however, is not sufficient. We trust most men with whom we deal. There must be something  reciprocal in the relationship before the rule can be invoked. Before liability can be fastened upon one there must have been something in the course of dealings for which he was in part responsible that induced another to lean upon him, and from which it can be inferred that the ordinary right to contract had been surrendered ...."

J.B. Hancock v. Jessie G. Anderson, 160 Va. 225; 168 S.E. 458; 1933 Va. LEXIS 201(Va. 1933).

The SEC also “has held that where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer … [BD advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers in situations where such reliance is not merited, and obscuring the merchandising aspects of the retail securities business … Where the relationship between the customer and broker is such that the former relies in whole or in part on the advice and recommendations of the latter, the salesman is, in effect, an investment adviser, and some of the aspects of a fiduciary relationship arise between the parties.” 1963 SEC Study, citing various SEC Releases.

Of course, it would be nice to get away from determining if a "confidential relation" exists.  In essence, this is the authority provided to the SEC under Dodd-Frank, at least with respect to brokerage firms and their registered representatives.  The SEC can choose to draw a new line, respective of the common law, and declare that the bona fide fiduciary standards found under the Advisers Act apply to brokers as to any customer for whom they provided personalized investment advice.

This is all just applying common sense - if you provide advice regarding this complex financial world in which we live - with its multitude of investment products and strategies and tax and financial planning concerns - you are relied upon to act in the best interests of the person who has hired you.  And that's a highly reasonable expectation by the person.

Be Wary of How You Hold Yourself Out! - Use of "Financial Planner" Is Significant Factor in Finding Fiduciary Status Exists.

Early on the SEC warned that, if you don't want to be a fiduciary, you should not be disguised as a trusted advisor.  In its 1941 Annual Report, the U.S. Securities and Exchange Commission noted: “If the transaction is in reality an arm's-length transaction between the securities house and its customer, then the securities house is not subject' to 'fiduciary duty. However, the necessity for a transaction to be really at arm's-length in order to escape fiduciary obligations, has been well stated by the United States Court of Appeals for the District of Columbia in a recently decided case:

‘[T]he old line should be held fast which marks off the obligation of confidence and conscience from the temptation induced by self-interest.  He who would deal at arm's length must stand at arm's length.  And he must do so openly as an adversary, not disguised as confidant and protector.  He cannot commingle his trusteeship with merchandizing on his own account…’”

Seventh Annual Report of the Securities and Exchange Commission, Fiscal Year Ended June 30, 1941, at p. 158, citing Earll v. Picken (1940) 113 F. 2d 150.

Also, several common law court cases over the past few decades – i.e., those few reported decisions which escape from the restrictions of securities arbitration and then, through appeals, lead to reported decisions – find that the use of titles that denote relationships of trust and confidence – such as “financial advisor” – becomes a significant factor in determining whether fiduciary status exist.

Account and Other Documentation Not Determinative of Fiduciary Status

One might assume, based on the discussion in the foregoing session, that all one must do to avoid being a fiduciary is to clearly disclose that the relationship is not a fiduciary one, and to not use titles or other descriptors which denote oneself as a trusted advisor.  But such an assumption would be incorrect.  You just can't declare yourself "not a fiduciary."  It's what you do, and how you hold yourself out, in all respects, that is conclusive as to whether fiduciary status exists under state common law.

Early on even the SRO for broker-dealers, NASD (now FINRA), in discussing the decisions of two court cases, said it was “worth quoting” statements from the opinions:  “In relation to the question of the capacity in which a broker-dealer acts, the opinion quotes from the Restatement of the law of Agency: ‘The understanding that one is to act primarily for the benefit of another is often the determinative feature in distinguishing the agency relationship from others. *** The name which the parties give the relationship is not determinative.’ And again: ‘An agency may, of course, arise out of correspondence and a course of conduct between the parties, despite a subsequent allegation that the parties acted as principals.’” - from N.A.S.D. News, published by the National Association of Securities Dealers, Volume II, Number 1 (Oct. 1, 1941).

Where is the Line Drawn – Fiduciary vs. Non-Fiduciary?

That's the subject of some debate.  Under state common law, it is always necessary to look at the totality of the facts and circumstances.  Fiduciary status is likely to be imposed where the client of a financial planner or securities investment broker is unsophisticated (i.e., the vast majority of clients).  Fiduciary status is less likely to be imposed upon a highly knowledgeable, sophisticated client.  (Wealth is not the determinant; rather, it is whether the client has vast experience and a very high level of knowledge regarding the transaction at hand - so that reliance by the sophisticated client does not exist.)  Of course, if the sophisticated person were truly that sophisticated, that person would have negotiated that the advisor with which he or she is dealing expressly assumes fiduciary status.  Why otherwise would a sophisticated investor desire, and expect to rely upon, the advisor's advice?

If you want an easy answer on where to draw the line, I would look no further than the comments made by a long-time leader of the profession, Harold Evensky.  As he eloquently puts it, if you just describe a financial product to a client, you are not a fiduciary.  But if you opine as to whether that product is good for the client, you are an advisor and hence a fiduciary.  It's a straightforward, relatively easy to apply line.

Many registered representatives may now be wondering ... "what about our suitability obligations, don't they require fiduciary status as you set forth the test above?"  Yes - suitability obligations still exist.  But "suitability" is an internal determination (and subsequent record) by the firm, and does not require that all of the determinations regarding suitability be conveyed to the client.  (Of course, facts and circumstances of the client must be periodically updated for the broker's internal records and to aid in the suitability analysis; but again a suitability determination does not require the furnishing of advice to the client.)

The CFP Board's Application of Fiduciary Status - Far Different from State Common Law?

This brings me to the CFP Board, and its methodology for applying fiduciary status.

I would first note that when, in 2007, the CFP Board adopted its current Standards of Professional Conduct, many who desire to see financial planners arise to the level of true fiduciaries were most appreciative of the courage the CFP Board undertook at the time.  This is especially so when we look back and realize that, just five years ago, there was little scholarly literature concerning the application of the fiduciary standard upon investment advisers and financial planners.

But with time has come a greater understanding of fiduciary duties, when they are applied under the law.  And hence, it is time to look more closely at the CFP Board's application of fiduciary status.

The CFP Board sets forth that there are several “personal financial planning subject areas” or “financial planning subject areas”, which “denote the basic subject fields covered in the financial planning process” and “which typically include, but are not limited to:”

• Financial statement preparation and analysis (including cash flow analysis/planning and budgeting),

• Insurance planning and risk management,

• Employee benefits planning,

• Investment planning,

• Income tax planning,

• Retirement planning, and

• Estate planning.

The CFP Board’s Standards of Professional Conduct then define “Personal financial planning” or “financial planning” as denoting the “process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial planning integrates the financial planning process with the financial planning subject areas. In determining whether the certificant is providing financial planning or material elements of financial planning, factors that may be considered include, but are not limited to:

• The client’s understanding and intent in engaging the certificant.

• The degree to which multiple financial planning subject areas are involved.

• The comprehensiveness of data gathering.

• The breadth and depth of recommendations.

Financial planning may occur even if the material elements are not provided to a client simultaneously, are delivered over a period of time, or are delivered as distinct subject areas. It is not necessary to provide a written financial plan to engage in financial planning.”

The CFP Board then proclaims, in its Standards of Professional Conduct, that “When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.”

The language found in the CFP Board’s Standards of Professional Conduct is not wholly unsatisfactory (as to when fiduciary status attaches), although some ambiguities are created.  More important, however, is how the CFP Board has chosen to apply this language.

The CFP Board places a huge emphasis on whether the financial planning engagement touches on more than one subject area.  For example, the CFP Board’s Q&A regarding its Standards state:

“Question 1-14: How many financial planning subject areas can a CFP® professional address with a client without reaching the level of “material elements of financial planning”?

Applying the financial planning process to a single subject area is not likely to be considered financial planning or material elements of financial planning. CFP® professionals who integrate the financial planning process and two or more subject areas may be providing financial planning or material elements of financial planning.”

Where did this “two or more subject areas” emphasis come from?  Not from the common law!  There are many cases which illustrate that the provision of investment advice, alone, involves a fiduciary relationship.  And other cases illustrate where another subject area – retirement planning – invokes fiduciary status.

(Indeed, as an instructor of retirement planning, there are not many instances within the realm of "retirement planning" in which advice is not provided to a client - whether it be to a plan sponsor or to an individual client.  I've never seen a "retirement plan" that does not provide advice - and a whole lot of it.)

The key again, under state common law, is not whether more than one “financial planning subject area” is touched upon, as the CFP Board appears to now emphasizes. Rather, the key is whether any advice is provided.  Whether the advice be investment advice, retirement planning (accumulation or decumulation planning included), or estate planning, all of these are likely to arise to the level of a fiduciary relationship.

It is this recent emphasis by the CFP Board on “two or more subject areas” that is befuddling.  The CFP Board needs to make it clear that the provision of any advice, even within one subject area, will likely give rise to the application of fiduciary status under state common law.  Otherwise, CFP Certificants may be blindly led down a path – at each Certificant’s peril - in which they assume they are not fiduciaries, but where a court or arbitrator would likely decide otherwise.

Fraudulent Advertising by CFP Board?

When it was announced, I applauded the CFP Board’s advertising campaign.  Designed to promote the CFP® mark, and lead to greater understanding by consumers of the benefits of personal financial planning, I saw it as a means of advancing the profession of financial planning.  I still do.

But I am disturbed by some aspects of this advertising campaign.

Let me preface this by the fact that I constantly remind myself of a quote from a paper written in 2010 by Professors James Angel and Douglas M. McCabe: “To give biased advice with the aura of advice in the customer’s best interest is fraud.”

And I’m reminded of the language of the SEC’s 1941 annual report, that a product salesperson (non-fiduciary) “must do so openly as an adversary, not disguised as confidant and protector.” 

I am also reminder of this excerpt from the SEC’s 1963 Report: “where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer … [BD advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers.”

So why I am disturbed by the actions of the CFP Board?  Here are just two examples:

One CFP Board’s advertisment that states: “Bring all your finances together w/help of the 1 person who can" implies CFPs provide ADVICE, not products.

Another CFP Board advertisement boldly proclaims that CFPs "Put Your Needs First."  It doesn’t take a rocket scientist to know that this implies – to consumers – that CFPs are trusted advisors (and hence fiduciaries).

But, as it stands right now, not all CFPs are fiduciaries.

Moreover, the mere use of the title “financial planner” (and even more so, Certified Financial Planner™” – leads the consumer to believe that advice will be received.

Of course, not just the CFP Board can be singled out on this point.  Many other designations and certifications use terminology such as “financial consultant” or “advisor” within the title.  One must ask … didn’t they know, at the time they created the designation, that holding oneself out as a “consultant” or “planner” or “advisor” (or similar terms) was a significant factor, under state common law, in finding that fiduciary status exists?  And don’t they realize that disguising the certificant or designess as a “confident” – when the certificant or designee is not – amounts to fraud?

Where Do We Go From Here?

I hope the CFP Board “moves the ball forward.”

I hope the CFP Board recognizes that nearly all consumers believe that securities professionals – espcially CFPs – are trusted advisors.  They believe that the CFP Certificant is acting in their best interests.  That trust should not be violated by the CFP Board’s overly permissive policies.

I hope the CFP Board will revise and clarify its Standards of Professional Conduct, and recent interpretations thereof, to recognize that all those who hold themselves out as CFP® Certificants should be held to fiduciary status at all times.  To do otherwise is fraud.

I hope that the CFP Board further takes the necessary step to delineate what fiduciary standards exist – for the education of CFP Certificants.  Currently the CFP describes the “fiduciary duty of care.”  Even a cursory elicitation of fiduciary duties sets forth that there are the often-referred-to triparte fiduciary duties of “due care, loyalty, and utmost good faith.”  And it is possible to come up with much better guidance within the Standards of Professional Conduct – by elaborating on the principles further.  This is illustrated by the American Bar Association’s Model Rules of Professional Conduct for lawyers.

I further hope that the CFP Board will lead the profession – toward a true profession, in which Certified Financial Planners are fiduciaries at all times.  Every profession has the incentive to ensure its members hold themselves to higher standards.  By adopting the fiduciary standard for all CFPs, at all times, consumers will come to recognize that they can trust CFPs.  This will lead to far greater utilization of the services of Certified Financial Planners by consumers.

Indeed, adopting a clear, unequivocal fiduciary standard of conduct, as found in state common law, for CFP Certificants, will do far, far more to advance the CFP® mark and the utilization of financial planning services than any advertising campaign could ever hope to achieve.

Of course, there are powerful economic forces which oppose application of fiduciary standards.  And the adoption of a common-sense all-the-time clear fiducary standard for CFP Certificants may well cause some who hold the CFP© certification to relinquish it.  But, in my mind, that’s ok.  If you don’t want to act in the best interests of your clients, I don’t want you as my professional colleague.

And, those CFP Certificants who remain will be proud to associate with the remaining CFP Certificants,.  With a new, clear understanding of the vital trust placed into our hands by consumers, and that all “planners” are “advice providers” and hence fiduciaries at all times, we will move the profession forward, and rapidly, to even greater interest from the public.  With such greater demand for services will come new entrants into the CFP community, attracted by the high standards of conduct and the new level of respect which CFP Certificants are afforded.

In 2007 a brave group of directors of the Certified Financial Planner Board of Standards, Inc. set aside their individual self-interests and adopted a fiduciary standard of conduct (at least much of the time) for Certified Financial Planners.  Now, more than five years later, it is time for this Board of Directors to complete the task – and in so doing move us toward a true profession of financial planners, all bound together by the highest standards of conduct, mutual admiration, and the respect of the public and public policy makers alike.

A Reply to the CEO of the CFP Board

I appreciate the November 1, 2012 response of the CFP Board’s CEO, Kevin Keller in Financial Planning (http://www.financial-planning.com/blogs/Fiduciary-Standard-Moving-the-Ball-Forward-2681644-1.html?pg=1) to my prior blog post, and I welcome the continued dialogue on these important issues.  I urge all stakeholders affected by this discussion to weigh in with their views.  To this end, and as a means of replying to Mr. Keller’s remarks, I offer this follow-up blog post on this important issue.

INTRODUCTION

As I mentioned previously, I applauded the CFP Board for having moved the ball forward in 2007.  Furthermore, I also state now that I applaud the CFP Board’s educational and testing regimes; over time these have set the standard for the minimal competency levels which should be expected of every person providing personalized individual financial or investment advice.

I have questioned, however, in the context of continued evolution of the profession toward a true profession, whether it is time that the CFP Board’s Standards of Professional Conduct be revised and updated, in order to reflect: (1) the greater understanding of the fiduciary standard of conduct by leaders of the profession, now compared to five years ago; (2) the broad application of the fiduciary standard to brokers and their registered representatives who provide personal financial or investment advice (notwithstanding lack of registration as an RIA); (3) the importance of the fiduciary standard as a means of consumer protection, especially in this modern era where it is well-known that disclosures are largely ineffective as a means of consumer protection when dealing with such complex, intricate matters as financial planning and investments.

ON THE ISSUE OF “FRAUD.”

Mr. Keller questions my statement that failure to hold CFP® certificants to fiduciary status amounts to fraud.  I reply.

First, I note that my previous blog post stated:

“[T]he mere use of the title ‘financial planner’ (and even more so, Certified Financial Planner™” – leads the consumer to believe that advice will be received.

Of course, not just the CFP Board can be singled out on this point.  Many other designations and certifications use terminology such as ‘financial consultant’ or ‘advisor’ within the title.  One must ask … didn’t they know, at the time they created the designation, that holding oneself out as a ‘consultant’ or ‘planner’ or ‘advisor’ (or similar terms) was a significant factor, under state common law, in finding that fiduciary status exists?  And don’t they realize that disguising the certificant or designee as a “confident” – when the certificant or designee is not – amounts to fraud? …

I hope the CFP Board will revise and clarify its Standards of Professional Conduct, and recent interpretations thereof, to recognize that all those who hold themselves out as CFP® certificants should be held to fiduciary status at all times.  To do otherwise is fraud.”

I would first note, as set forth in my recent blog post (but omitted from Mr. Keller’s commentary), that the CFP Board uses advertisements and promotions which either expressly state or imply that a relationship of trust exists between CFP certificants and consumers.  I simply ask that the CFP Board not undertake misrepresentations to consumers.  It is a reality that, under the CFP Board’s own rules, currently not all CFP® certificants place all consumers’ best interests first when providing personalized financial planning or investment advice.  Until and unless the CFP Board actually requires that all CFP® certificants adhere to the fiduciary standard at all times when providing advice to clients, these particular ads should cease.

For some additional examples of the content which is questionable, please refer to the following:

1.             CFP Board Commercial:  “Does your financial advisor see a client? or Cash? Put your needs first. Work with a CFP® Professional.”  [Emphasis added.]  A copy of this commercial located at http://www.youtube.com/watch?v=F2yVP3mEYbw&feature=rellist&playnext=1&list=PL9B1E9E1C26D1A25D.
2.          CFP Board’s “Garden’ Banner Ad” which states: “Is your financial advisor more interested in growing your finances … or taking his cut? … Put your needs first.  Work with a CFP® Professional.”  [Emphasis added.]  For a copy of this and other banner ads, visit http://www.cfp.net/publicawareness/banners.asp.
3.          CFP Board’s written ad containing the phrase, “Americans Need Financial Advice They Can Trust,” which is found at http://www.cfp.net/teamup/toolkit.asp#Ads. [Emphasis added.] 
4.    .    CFP Board’s “Let’s Make a Plan – Talking Points” document states, in part, “As a CFP® professional, I’m here to serve consumers … My CFP® mark distinguishes me among my peers in the financial services industry as it shows that I have voluntarily met rigorous requirements of education, examination and experience and abide by CFP Board’s Standards of Professional Conduct, which includes agreeing to a fiduciary standard of care that places my clients’ interests first.”  [Emphasis added.]  http://www.cfp.net/publicawareness/messages.pdf

Again, since the CFP Board acknowledges that not all those use the certification marks (CFP® or Certified Financial Planner™) adhere to the fiduciary standard when providing financial or investment advice, I remain concerned that the public is misled by some of the content contained in the CFP Board’s promotional campaigns. 

There is significant scholarly and legal and regulatory authority in support for my proposition that if one holds out as a “financial planner” or “Certified Financial Planner™ (“CFP®), without assuming fiduciary status, fraud may well occur.  For example, the following extendeed passage is from a fairly recent article by Professors Angel and McCabe:

“The relationship between a customer and the financial practitioner should govern the nature of their mutual ethical obligations. Where the fundamental nature of the relationship is one in which customer depends on the practitioner to craft solutions for the customer’s financial problems, the ethical standard should be a fiduciary one that the advice is in the best interest of the customer. To do otherwise – to give biased advice with the aura of advice in the customer’s best interest – is fraud. This standard should apply regardless of whether the advice givers call themselves advisors, advisers, brokers, consultants, managers or planners.”

Angel, James J. and McCabe, Douglas M., Ethical Standards for Stockbrokers: Fiduciary or Suitability? (September 30, 2010).  Available at SSRN: http://ssrn.com/abstract=1686756.

Many court decisions also reflect the principle that how one holds himself or herself out is a significant factor in determining whether fiduciary status exists.  For example:

•           In a bankruptcy case involving an insurance agent (Mr. Smith) who filed for bankruptcy and sought to discharge a claim based upon breach of fiduciary duty, the Court stated: “In the present instance [the customers] were parties devoid of any financial sophistication. On the other hand, Mr. Smith claimed to be and, in fact, was a ‘financial advisor’ who certainly possessed a far superior expertise concerning investments than either [of the customers]. Mr. Smith was fully aware of the financial conditions of both considering their age and their situation in life … Even to suggest and recommend, let alone persuade [the customers] to invest their entire retirement assets in such a [Ponzi] scheme, was while not fraudulent, certainly amounted to a breach of the fiduciary duty owed by Mr. Smith to Ms. Wilson and Ms. Judson.” In re Gregory Smith (Bkrpt.Ct. M.D. Fl. 2005).
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•           “In the fall of 1985, plaintiff, having recently divorced and relocated to Columbus, Ohio, sought investment advice from Thomas J. Rosser. At the time, Rosser was a licensed salesman for Great Lakes Securities Company and held himself out as a financial advisor … [T]he evidence established that Rosser was a licensed stockbroker and held himself out as a financial advisor, and that plaintiff was an unsophisticated investor who sought investment advice from Rosser precisely because of his alleged expertise as a broker and investment advisor. Further, Rosser testified that plaintiff had relied upon his experience, knowledge, and expertise in seeking his advice. Therefore, we conclude that plaintiff presented sufficient evidence to establish that she and Rosser were in a fiduciary relationship.”  Mathias v. Rosser, 2002 OH 2531 (OHCA, 2002).
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•         When a bank held out as either an “investment planner,” “financial planner,” or “financial advisor,” the Wisconsin Supreme Court held that a fiduciary duty may arise in such circumstances.  Hatleberg v. Norwest Bank Wisconsin, 2005 WI 109, 700 N.W.2d 15 (WI, 2005).
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•          A dual registrant crossed the line in "holding out" as a financial advisor, and in stating that ongoing advice would be provided, and other representations, and in so doing the dual registrant, who sold a variable annuity, and was found to have formed a relationship of trust and confidence with the customers to which fiduciary status attached. Western Reserve Life Assurance Company of Ohio vs. Graben, No. 2-05-328-CV (Tex. App. 6/28/2007) (Tex. App., 2007).
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• .       Insurance agents who introduced themselves as “investment counselors or enrollers” and who tailored retirement plans for each person depending on the individual’s financial position, and who led the customers to believe that an investment plan was being drafted for each customer according to each customer’s needs, was held by a federal court, apply Iowa state common law, to lead to the possible imposition of fiduciary status.  Cunningham vs. PLI Life Insurance Company, 42 F.Supp.2d 872 (1990)
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•       A U.S. District Court in 1985 held that a fiduciary relationship existed in part because of a defendant's holding out as a financial planner to clients.  CSCC was primarily in the business of real estate syndication, but also in business under the name Creative Financial Planning.  “The developer defendants obtained investment capital from the public by posing as financial planners ... The financial planners typically had a background in either insurance or real estate sales …  As an alleged financial planning company, CSCC, dba Creative Financial Planners, contacted potential investors by conducting Creative Financial Planning seminars open to the public. Utilizing a slick presentation… CSCC attempted to lure investment capital out of savings accounts, home equity, insurance policies, and other conservative investment vehicles and into the speculative real estate ventures it controlled … At the seminars, CSCC offered to draft a ‘Coordinated Financial Plan’ for attendees at little or no charge. Individuals who accepted this offer received recommendations to purchase limited partnership or trust deed interests in CSCC controlled partnerships and project ....” Koehler v. Pulvers, 614 F. Supp. 829 (USDC, Cal, 1985).

Some state statutes also reflect the principle that if one “holds out” as a financial planner, fiduciary status should exist, although it remains unclear as to whether, and how, these statutes are actually enforced.  For example, in Maryland the statutes provide that ones who holds out as a financial planner is deemed to fall within the definition of investment adviser. {“An investment adviser means a person who, for compensation: (i) Engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities; or (ii) 1. Provides or offers to provide, directly or indirectly, financial and investment counseling or advice, on a group or individual basis; 2. Gathers information relating to investments, establishes financial goals and objectives, processes and analyzes the information gathered, and recommends a financial plan; or 3. Holds out as an investment adviser in any way, including indicating by advertisement, card, or letterhead, or in any other manner indicates that the person is, a financial or investment ‘planner’, ‘counselor’, ‘consultant’, or any other similar type of adviser or consultant.” Md. Code Ann., Corps. & Ass'ns § 11-101(h). [Emphasis added.]]  Of course, it would be wholly dysfunctional to think that a “certified financial planner™” would be excepted from these statutory requirements, which applies to a “financial planner” – simply because the word “certified” is utilized as a prefix thereto.

Lastly, and perhaps most importantly, I also referred, in my original blog post, to statements made by the SEC, cautioning on the use of advertisements and titles to denote a relationship of trust and confidence when none exists.

For example, in its 1940 Annual Report the U.S. Securities and Exchange Commission stated: “If the transaction is in reality an arm's-length transaction between the securities house and its customer, then the securities house is not subject' to 'fiduciary duty. However, the necessity for a transaction to be really at arm's-length in order to escape fiduciary obligations, has been well stated by the United States Court of Appeals for the District of Columbia in a recently decided case: ‘[T]he old line should be held fast which marks off the obligation of confidence and conscience from the temptation induced by self-interest.  He who would deal at arm's length must stand at arm's length.  And he must do so openly as an adversary, not disguised as confidant and protector.  He cannot commingle his trusteeship with merchandizing on his own account…’”  Seventh Annual Report of the Securities and Exchange Commission, Fiscal Year Ended June 30, 1941, at p. 158, citing Earll v. Picken (1940) 113 F. 2d 150.

The SEC also “held that where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer … [BD advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers in situations where such reliance is not merited, and obscuring the merchandising aspects of the retail securities business … Where the relationship between the customer and broker is such that the former relies in whole or in part on the advice and recommendations of the latter, the salesman is, in effect, an investment adviser, and some of the aspects of a fiduciary relationship arise between the parties.” 1963 SEC Study, citing various SEC Releases.

In summary, I don’t believe it is too much to request that the CFP Board not engage in advertising which may mislead the public.  Until such time as all CFP® certificants are held by the CFP Board to fiduciary status at all times when providing personalized investment and/or financial advice, the advertisements of the CFP Board suggesting a relationship of “trust” and that CFP® certificants act in the “best interests” of their clients could, as to some customers of some CFP® certificants®, be misleading.  Hence, these advertisements should be withdrawn (or modified with an appropriate disclaimer).  Right now, as it stands, the CFP Board’s advertisements are not always reflective of the reality of the engagement which actually ensues between the consumer and the “planner.”

Simply put, if the CFP Board promotes all CFP certificants as trusted advisors who put the clients’ best interests first and foremost, then the CFP Board should hold all of its certificants to the fiduciary standard.   If the CFP Board is going to talk the talk, then the CFP Board should walk the walk.

ON THE ISSUE OF “DETERMINING A FIDUCIARY RELATIONSHIP.”

Mr. Keller writes: “Rhoades mistakenly accuses CFP Board of placing a ‘huge emphasis on whether the financial planning engagement touches on more than one subject area.’  In actuality, the degree to which multiple financial planning subject areas are involved is just one of a number of factors the board considers in determining whether a CFP professional is in a fiduciary relationship.”

I find it hard to reconcile Mr. Keller’s statement with both the presentations I have seen (in CFP Board ethics courses in recent years), as well as the following language which I set forth in my previously blog.  This language is taken from the CFP Board’s own Q&A regarding its Standards:

Question 1-14: “How many financial planning subject areas can a CFP® professional address with a client without reaching the level of ‘material elements of financial planning’?”

[Answer.]  “Applying the financial planning process to a single subject area is not likely to be considered financial planning or material elements of financial planning. CFP® professionals who integrate the financial planning process and two or more subject areas may be providing financial planning or material elements of financial planning.”

If Mr. Keller’s statement is more reflective of the current state of the CFP Board’s interpretation, then I urge the CFP Board to revise or withdraw the foregoing language from its Q&A document.

A CALL FOR THE CFP BOARD TO LEAD THE WAY.

I would ask of us all these questions:

 If our professional organizations do not voluntarily hold us to the fiduciary standard of conduct, what right to we have to request that it be imposed by legislators or regulators?  In other words, hHow can we approach policy leaders to insist on statutory or regulatory imposition of bona fide fiduciary standards without adopting the fiduciary standard ourselves?

Just as importantly, should our professional organizations lead us toward a true profession, or should we only seek to achieve such status when forced to by our regulators? 

As we seek to answer these questions, we must realize that the fiduciary standard is one of the hallmarks of a true profession.  Robert Kennedy, in his Sept. 2001 article, “The Professionalization of Work,” noted: “As a practical matter, we are willing to permit professionals a great deal of liberty as long as we believe that we can trust them to place the welfare of those they serve (clients, patients, students, and so on) ahead of their own interests, and to practice competently … This trust is sometimes betrayed by professionals, and the community is rightly skeptical of the power of those with special knowledge. This knowledge can be used to help or to harm, and often we do not discover which it will be until it is too late.”

Professor Kennedy goes on to discuss the service attribute of a true profession, stating: “[T]he true professional also professes service to others. That is, professionals publicly commit themselves to use their special knowledge principally to serve others and not primarily to serve themselves. This does not mean that professionals must be selfless in their practices. Quite the contrary, they may be well compensated in a variety of ways for what they do. However, their first concern in making decisions will always be the benefit to the person served, and only secondarily the consequences to themselves. Furthermore, they place themselves at the service not only of their friends and neighbors, but of strangers as well. They are public persons and so have an obligation to serve those in need, regardless of personal relationship.”

I urge us all to consider this reality, as well.  If CFP® become bound by the fiduciary standard of conduct at all times when providing financial or investment advice, then the demand for the services of CFP® certificants will soar.

I repeat my close from my earlier blog post: "In 2007 a brave group of directors of the Certified Financial Planner Board of Standards, Inc. set aside their individual self-interests and adopted a fiduciary standard of conduct (at least much of the time) for Certified Financial Planners.  Now, more than five years later, it is time for this Board of Directors to complete the task – and in so doing move us toward a true profession of financial planners, all bound together by the highest standards of conduct, mutual admiration, and the respect of the public and public policy makers alike."

I now add that I further hope that the CFP Board’s leaders will not just seek to protect the CFP® mark, as to the number of certificants who utilize the mark. Should some certificants feel compelled to surrender their certification if a bona fide fiduciary standard is adopted for all those who utilize the mark “CFP®,” so be it.  We need to move forward to a true profession, and if this means that the number of CFP® certificants falls briefly, then so be it.

Rest assured, however, of the final result should the CFP Board move forward in the direction I (and many others) have proposed.  Within a short time of adopting a “fiduciary-all-the-time-when-providing-advice” standard for CFP® certificants, the consuming public (in large part due to the media attention such a move will garner, both initially and thereafter) will possess a much greater respect for CFP® certificants and flock in large numbers to seek out their services.  In turn this will lead to a far greater number of new CFP® certificants, in order to meet the substantially increased demand for fiduciary financial advice.

In short, moving forward is good for consumers, and it is likewise good for CFP professionals. Let us give this concept of "moving forward" our increased attention, and deliberate and careful consideration, in the weeks and months ahead.

Respectfully submitted.  Ron A. Rhoades, JD, CFP®

Most Courageous: Phyllis Borzi and her EBSA Team

Here are some questions for you:

• Who has saved investors billions of dollars in unnecessary fees over just the past year? 

• Who, by means of simple regulatory rule changes, compelled disclosure of fees and costs of qualified retirement plans in a meaningful way to both plan sponsors and plan participants, has led to ever-increasing pressure on advisors to plan to select lower-cost mutual funds, thereby securing a better retirement for tens of millions of our fellow citizens?

• Who, despite millions and millions of dollars of lobbying by opponents in the insurance industry and large Wall Street firms, is forging ahead to bring fiduciary duties to nearly all providers of investment advice to qualified retirement plan sponsors, and to participants of retirement plan and IRA accounts?

The answer is Phyllis Borzi, Asst. Secretary of Labor, and her great team at the Employee Benefits Security Administration (EBSA), part of the U.S. Department of Labor (DOL).

In essence, the DOL / EBSA forges ahead, while FINRA continues over decades of mistakes in failing to raise standards, and SEC appears reluctant to face up to Wall Street and apply fiduciary standards to personalized investment advice.

Of course, it is easy to criticize FINRA (f/k/a NASD), whose 1942 adoption of Rules of Conduct lacked the essential ingredient - incorporation of fiduciary duties for the advisory activities of brokers (as exists under the state common law. This is the case even though, back in the early states of federal securities regulation, and now, courts and arbitrators continues to find brokers in relationships of trust and confidence with there clients and hence subject to broad fiduciary duties.

Moreover, FINRA and its member broker-dealer firms have a long history of opposing the essential consumer protections imposed by the fiduciary principle, and which for so long have been known to exist for those who are entrusted to provide personalized investment advice. The Maloney Act of 1938, which for its authors had the goal of raising the securities industry to the highest standards of professionals, is but a dismal failure, due to FINRA.

It is also easy to criticize the SEC, who despite an early history of imposing fiduciary duties upon brokers in relationships of trust and confidence, has so often retreated from its earlier stances. In recent years it has permitted brokers to hold themselves out as trusted advisors (through the use of titles denoting relationships of trust and confidence, and by advertising which obscures the merchandizing efforts of those who sell products). The SEC's most recent release, seeking comment on the application of fiduciary duties to brokers, is indicative of a possible failure in key understandings - now informed by many academic studies - that financial literacy is mostly ineffective, and that disclosures are inadequate (due to many behavioral biases) as a means of consumer protection when such great information asymmetry is present in today's complex financial world.

But you can't criticize the DOL's effort, at least with respect to the EBSA under the leadership of Phyllis Borzi. Despite fierce Wall Street lobbying against her efforts in recent years, she has remained steadfast. Her team has undertaken the altogether necessary steps to re-propose the "Definition of Fiduciary" rule sometime during 2013, backed now by an extensive economic analysis. And this re-proposed rule, if enacted, will be a game-changer. With its potential application to IRA accounts, another $5 trillion of retirement savings will be brought under the fiduciary realm, in addition to the trillions of dollars in qualified retirement plan accounts advised upon currently by those who escape fiduciary duties under the current befuddling and narrow definition of fiduciary (as exists since 1976 ERISA rules were adopted).

How impactful will Phyllis Borzi's re-proposed rule be? Just imagine the powerful force of having individual investors aided by fiduciary "purchaser's representatives." As a result, there will be renewed pressure to lower fees and costs throughout the investment industry. Tens of billions of dollars of more savings for investors, each and every year, resulting (though the miracle of compounding) in a "retirement endowment" for our fellow citizens reaching hundreds of billions of dollars - or even trillions more - than would otherwise be possible.

More importantly, workers will get better advice, and they will be taught to save more, when aided by truly objective financial advisors. As greater and greater amounts are saved for retirement, and the amounts grow better over time through better investment choices, our fellow Americans will become better prepared for their retirement and other financial needs. This is highly important for our nation, as well, for it is self-evident that our federal and state governments are ill-prepared to lend future economic support to an ever-growing number of retirees who, lacking adequate retirement savings, would call upon governments for assistance.

Just as important, with increased saving and better investing will come greater capital formation. The cost of capital will in turn be lowered for companies, both large and small. This will assist in fueling a new explosion of economic growth in our country. Indeed, it is hard to imagine any business owner or executive, large or small, who could not be excited about this re-proposed rule and its positive implications for America's economic growth. (Except, of course, those executives on Wall Street at at insurance companies who currently extract excessive rents from qualified retirement plan and IRA accounts.)

Of course, Phyllis Borzi's efforts, and those of her EBSA team, are not going unnoticed on Wall Street. The powerful force of disintermediation which the application of fiduciary principles will impose on Wall Street and insurance companies will mean that the financial services sector's share of the profits generated in this country, which has once again risen above 30% (and perhaps much higher), will decline to much more reasonable levels. In essence, Wall Street's investment banks and broker-dealers will be hurt, economically. They won't be able to pay out such great bonuses to their executives and employees. They won't consume such a great portion of the wealth of our country. (But who will cry over that, except those who work in the insurance companies and for Wall Street's large broker-dealer firms?)

The forthcoming re-proposal of the "Definition of Fiduciary" rule, despite its huge important to hundreds of millions of Americans, and to the economic future of America itself, will face substantial opposition from Wall Street's legions of lobbyists. These well-paid lobbyists will coddle up to those in Congress, and supply both Senators and Representatives with pre-worded letters written in opposition to the proposed rule (and supply them with campaign cash, as well). With its powerful and monied lobby, Wall Street and the insurance companies will also try desperately to influence the White House, OMB, the Department of the Treasury, and whoever else will listen.

But I am optimistic, despite the huge economic forces lined up against Phyllis Borzi and her team at EBSA. EBSA has done its homework, with a substantial economic analysis supporting the re-proposed rule. The EBSA team members have put their heart and soul into the re-proposed rule. The economic analysis they will provide will, no doubt, clearly demonstrate the huge benefits of the re-proposed rule to tens of millions of Americans. The carefully crafted re-proposed rule will, if adopted, create a new, promising environment for the delivery of investment advice to our fellow Americans under the auspices of ERISA's strict fiduciary standard and prohibited transaction rules.

Hence, Phyllis Borzi's cause is our cause.

• This re-proposed rule should be the cause of every financial advisor who cares about our country's future, and their fellow citizens.
• This re-proposed rule should be the cause of every investment adviser who, despite the disintermediation which will occur, sees this proposed rule as both logical and right for our fellow citizens, and good for America itself.
• This re-proposed rule should be the cause of each and every person who desires to become part of a true profession of financial planners and investment advisers, bound together by a common fiduciary oath to act in the best interests of our clients at all times.
• And (as I hope the media will especially realize), this re-proposed rule should be the cause of our fellow citizens - workers and retirees alike - who so desire a future in which they can rightly place their trust in experts who will help them to achieve their lifetime financial goals.

To Phyllis Borzi and her team, I say: "Go for it!" It will take several months for the actual rule to work its way through OMB and other processes, before it emerges for public view. But please don't let this deter your efforts.

To all financial and investment professionals concerned about progress toward a true profession, to our fellow citizens who care about their own retirement security and about the future of America, I ask that you be prepared to lend your support to Phyllis Borzi's noble cause - applying the fiduciary standard of conduct to all of the investment advice provided to qualified retirement plan sponsors, participants, and IRA account holders, in every corner of this great nation of ours.

More to follow ... on this important issue, in the months ahead.

For updates, follow me on Twitter - @140ltd, or connect with me on LinkedIn or Facebook.

Yours truly, Ron A. Rhoades, JD, CFP(r)

Registered Investment Advisers: A New Paradigm for Regulation and Enforcement

Table of Contents
1. The SEC's Flawed Examination Process
2. A Call for Sound Principles-Based Regulation
3. Professional Involvment in Developing Professional Standards of Conduct
4. The Necessity of Professional Peer Review


1. THE SEC'S FLAWED EXAMINATION PROCESS.

Why are registered investment advisers (RIAs) and their investment adviser representatives (IARs) treated like criminals? Other professionals - attorneys and CPAs for example - don't receive the intense scrutiny during examinations which RIAs receive. Other professionals are not bound to observe a host of rules and regulations which add substantially to the cost of doing business. While there does exist one distinction - i.e., RIAs may possess control over "other people's money," in this post I submit that there are far sounder ways of protecting the public than those currently utilized.

It's easy to criticize the U.S. Securities and Exchange Commission (SEC) and state securities regulators. Over the years they have imposed more and more rules and requirements on registered investment advisers (RIAs) and their investment adviser representatives (IARs). The onsite examinations of small- and mid-size firms often last several days, or several weeks, with a "deficiency letter" following detailing minor transgressions in observing procedures required by the regulators. Very few onsite examinations uncover serious fraud ... rather, theft of client assets is usually uncovered via a complaint from a client or from a disgruntled employee.

I have previously written of the need for the SEC to focus upon actual fraud, in this era of limited funding of government operations. What should an examination look like? First, much of it should be done via an information request, with records electronically delivered to an SEC examiner for a cost-efficient review. The onsite examination should be focused on the detection of actual fraud - i.e., theft or misuse of client assets.

During onsite examinations, SEC and/or state securities examiners should go around to each and every employee of the company, hand out their business cards, and even inform employees of the availability of making an anonymous complaint against the firm. All employees should be required to attest to the fact that theft of clients' funds is not occurring, and that all funds are properly custodied. That's the way to detect fraud!

Of course, most smaller RIA firms don't possess custody of their clients' assets - the client assets are harbored in accounts with a discount broker (custodian). Hence, firms without custody are low-risk. But frequent inspections are still required - in order to verify that no custody actually exists.

In those circumstances where RIA firms take on custody, then a greater onsite review would be required. The essential role of government oversight of RIAs (and Wall Street, generally) is that of asset verification - i.e., ensuring that the client's/customer's assets are in fact there. And firms that take on custody should pay higher fees, due to the necesssity for more intrusive oversight (and the costs thereof).

We must realize that most Ponzi schemes are not "planned" months in advance of their commencement by the perpetrators. Rather, a registered representative or RIA/IAR gets into financial trouble, and he or she begins to "borrow" from client accounts. Slowly the situation balloons, ever-bigger. Self-justification of transgressions becomes the norm. As the fraud grows ever-bigger, most Ponzi artists actually want to get caught.

Hence, frequent inspections of all RIA firms are necessary - to prevent transgressions from escalating into situations where national press reports a multi-million dollar theft. But such examinations do not need to last for many days, or many weeks, in most instances.

By undertaking far more focused examinations, securities examiners can examine all RIA firms far more often. They can ensure that firms accurately report whether they possess custody. They can seek out employees who can whistelblow. They can inspect those RIA firms who possess custody of client assets, with the focus of the inspection on asset verification. In this manner, they would be able to detect frauds before they blossom until large, multi-million dollar (or billion-dollar) frauds. In essence, the securities examiners would be doing the core of their job - protecting the public from thievery. And, by reducing the number of actual frauds, greater consumer confidence will occur in our financial services system.

2.  A CALL FOR SOUND PRINCIPLES-BASED REGULATION

The fiduciary standard imposed upon RIAs and their IARs is beautiful in both its simplicity and its adaptability. Unlike a bevy of rules designed to prevent specific actions (which are often circumvented by new schemes falling outside the specific rules), the fiduciary standard is principles-based regulation.

This does not mean, however, that RIAs should not understand their fiduciary obligations. Guidance is required, and much more so that the simple statement that "RIAs have to act in their clients' best interests." Even the common (in the U.S.) triparte recitation of the fiduciary standard - that it consists of the duty of due care, the duty of loyalty, and the duty of utmost good faith - is insufficient to furnish adequate guidance to RIAs.

What is needed is a more comprehensive set of Standards of Professional Conduct for all individuals who practice as RIAs/IARs. Notice I say all individuals, not firms. Professional regulation does not involve setting standards for firms, but rather for the individual in those firms. In this manner, the development of standards is far more likely to evolve properly, by keeping the standards at the highest level. Otherwise, the economic interests of for-profit firms would, over time, negate the elevation of standards. (This has happened under the Maloney Act and with FINRA - where the creators of the Act desired to raise the standards of broker-dealer firms and their registered representatives to the "highest levels" over time, but due to the protection of the economic interests of its broker-dealer members FINRA has kept the standard to that of the very low standard of "suitability".)

3. PROFESSIONAL INVOLVEMENT IN DEVELOPING STANDARDS OF PROFESSIONAL CONDUCT

From where might we discern a comprehensive set of Standards of Professional Conduct? There are many models to choose from, and sources of information. I tend to favor the American Bar Association's Model Rules of Professional Conduct as an illustrative template. But other existing standards can be looked at, including those found in ISO 22222, the CFP Board's Standards of Professional Conduct, the standards for CPA/PFS, and those of the CFA Institute for its members. Of course, existing state common law, FINRA arbitration decisions, SEC regulations and no-action letters and regulations, and those decisions and rules of other agencies should be consulted during this process.

(For an illustration of just what a principles-based set of professional standards of conduct might look like, view pages 49 ff. of my prior submission to the DOL, located at http://www.dol.gov/ebsa/pdf/1210-AB32-PH029.pdf.)

Who should develop these new Standards of Professional Conduct? The answer is clear ... the professionals themselves. Only those with a thorough knowledge of the profession can envision how proposed rules are likely to be applied. Hence, I call upon the U.S. Securities and Exchange Commission (SEC) and the state securities regulators (through their association, the North American Securities Administrators Association, or NASAA) to form, together with the U.S. Department of Labor (DOL/EBSA), the Commodities Futures Trading Commission (CFTC), and the Municipal Securities Rulemaking Board (MSRB), an Advisory Board for the purpose of establising Standards of Professional Conduct for those individuals who practice as RIAs/IARs.

The members of such an Advisory Board should be wholeheartedly committed to the fiduciary standard of conduct. They should be leaders of the profession. Aided by competent staff, these members should, over a period of time, develop the Standards of Professional Conduct for RIAs. As part of this process, existing regulations requiring RIAs to undertake various actions or maintain certain records should be examined and, where appropriate after applying a cost-benefit analysis, either retained, modified, or discarded.

4.  THE NECESSITY OF PROFESSIONAL PEER REVIEW.

One of the reasons that securities regulators tend to focus on minitae, as well as the adequacy of disclosures, is the fact that enforcement violations relating to inadequacy of procedures, or inadequacy of disclosures, are easy to detect for examiners, many of whom have never worked in the industry.

The lack of experienced professionals being involved in disciplinary actions often leads to harsh results. Many an RIA has spent tens of thousands of dollars (or hundreds of thousands of dollars, or millions of dollars) defending itself against an assertion by a securities examiner, where in the end no violation of the RIA's fiduciary duties has occurred.

Part of the difficulty lies in enforcing the fiduciary duty of due care. We must first decide if it is appropriate for the government to enforce this duty. I personally would opine "yes." Although private rights of action exist for breach of this duty, all professional organizations also take action upon complaints involving the duty of due care.

If we conclude that the fiduciary duty of due care is to be enforced, then peer review is a necessity. Both at the stage where probable cause for a violation is found (or not found), and thereafter during the hearing process. Only fellow professionals, with substantial experience, can responsibily adjudicate the many different types of situations arising under an IARs duty of due care.

Hence, I also call upon our government regulators to augment the current enforcement process with peer review - to aid examiners in determining whether violations exist and in determining the severity of transgressions - when a breach of fiduciary duty is alleged.

IN CONCLUSION.

The time has come for investment advisors (and, more broadly, financial planners) to be regulated under structures befitting their status as professionals. It is time for examinations to focus on the detection of actual fraud, and for professionals to otherwise be treated as such (not as suspects). It is time for professionals to be involved in the development of regulation and oversight procedures, as well as be involved through the necessary step of peer review of their fellow professionals when a potential transgression is noted.

As professionals this will require our time, energy, and perseverence to attain. But, if we are ever to be treated as the professionals we know we are, then it is time to make this transition happen. Why?

• For the betterment of consumers of our professional advice and services. Consumers deserve professional advice provided under true professional standards of conduct.
• For the enhancenment of the trust of consumers in our profession, through proper government oversight (enhanced frequency of more targeted examinations, and peer review). The resulting elevation of trust will no doubt lead to an explosion of demand for professional investment and financial planning advice.
• For you, and for me, to join together in a true profession. To be proud to call our peers fellow members of this profession. To be more knowledgeable, through the developed Professional Standards of Conduct, of the obligations we assume on behalf of our clients under the highest principle set forth in the law - the fiduciary standard.

Thank you.

Ron A. Rhoades, JD, CFP(r)
February 25, 2012

Ron Rhoades is the Curriculum Coordinator for the Financial Planning Program at Alfred State College, Alfred, New York, and a practicing investment adviser representative. He also currently serves as Chair of the Steering Committee of The Committee for the Fiduciary Standard. To contact Ron, please e-mail him at: RhoadeRA@AlfredState.edu.  Thank you.