Real World Woes: Steve Winks, the Fiduciary Duty and Independent Broker/Dealers
Posted by Bob Clark in UncategorizedIn the comments that he’s posted to this blog (for example, in this blog posting , Steve Winks raises some important issues that warrant further discussion. I’ve known Steve since he was a due diligence officer at a financial planning B/D in Atlanta in the ‘80s, and in more recent years I’ve heard him articulate his analysis of the implications for a fiduciary duty, much of which he’s been kind enough to share with us in his postings.
Steve does an excellent job of capturing the concerns that I’ve heard many registered reps express about the impending financial services regulation, particularly regarding the extension of a fiduciary duty to all financial advisors. Steve, like the many RRs he’s worked with over the years, comes from a brokerage environment, in which FINRA and then the B/Ds’ compliance departments lay down clear, concrete rules for the activities of their reps: which Series licenses they have to hold to conduct specific types of business, what disclosures they need to make to their clients, how to determine which products are suitable for which clients, and even what they can say about those products, etc. etc. Virtually every aspect of an RR’s business day is covered by some rule or regulation for the appropriate conduct.
As you can imagine, such a tightly controlled working environment also creates an overall sense of comfort and safety: play by the rules and no matter what happens to your clients’ portfolios, or what claims they might make against you, you and your firm won’t be held responsible. That’s not to say registered reps don’t care about the well-being of their clients—most of the RRs that I know do care. It’s a system that enables them to sell financial products secure in the knowledge that they’ve done what they’re supposed to do, and no one can say otherwise, regardless of the ultimate outcome of any transaction. Who would want to give that up?
Unfortunately, it’s also a system that’s based on an illusion. For should a registered reps’ actions ever be called into question, the matter isn’t resolved by a jury of laypeople, or even an elected judge—it’s referred to a securities industry arbitration panel, whose job is to determine whether the rep in question broke the rules, not whether the client was treated fairly. These securities industry rules—the ones that create such a comfortable safe harbor for registered reps everywhere—are never called into question. The rules themselves are never subjected to a judicial review of whether the client’s rights or interests were violated.
I don’t have any factual basis for this, but it’s my suspicion that if arbitration cases went instead to a real court of law, the brokers would lose a lot more of those cases. And that, if you read between the lines of Steve Winks’ postings, is what RRs are really afraid of. Steve attempts to solve this problem by calling for “hundreds of rules and regulations” that would recreate the current rules-based system to tell advisors exactly what they need to do. But it doesn’t work that way in the real world: most of us don’t have a set of rules we abide by. We have principles that we live by, that mostly boil down to “do the right thing:” don’t steal, don’t cheat, do what you say you’ll do, and don’t kill or maim. It’s not really that complicated. If a true fiduciary duty is imposed on all advisors, they’ll be subject for the first time to all the judgment calls that the rest of us make every day. Scary? I’m sure. The end of civilization as we know it? Probably not.
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REAL WORLD WOES RESOLVED
I appreciate Bob’s literary licence as an important advisor advocate.
But as professional manager, I have a different oppinion in how the industry can safely bring fiduciary standing within the reach of every advisor.
As a former President of FSC Advisory running the then largest coast to coast financial planning initiative in the country, having run the third largest retail and institutional advisory services platform on Wall Street at Prudential Securities, having run all the professionally managed packaged product areas at Wheat First Securities which morphed into Wachovia Securities (now Wells Fargo), and having worked with the top advisors and industry experts in defining advice and the necessary enabling resources to support fiduciary standing, in my considered opinion (and that of a thousand or so advisors at the top of the market each having a billion or so under management with an institutional bias) in order to safely bring fiduciary standing within the reach of every advisor (large and small) we must simplify execution without the denigration of the fiduciary standard of care. This requires scale beyond the reach of under resourced advisors.
Importantly because advice can mean anything any advisor wants it to mean, consumers are no longer willing to accept the advisors word for it when it comes to brokers/advisors acting ther client’s best interest. Thus in order to achieve scale and regain the trust of the investing public, large scale institutionalized support for fiduciary standing is terribly important for the advisor (higher margins, lower cost, preemptive advisor value proposition) and the consumer who can rely on a audit path to the necessary statutory documentation and an expert, objective third party opinion letter as to the fidelity of the prodent processes used and the resulting counsel. For those that do not see the importance of surety, they will be vulnerable to those that do.
This is not the real world as we know it because advisors are under resourced and b/ds and custodians rightly fear the support of fiduciary standing with out the necessary resources previously cited.
Simplification is achieved by making the hundreds of fiduciary duties required inherint in the prudent process which is audited back to objective criteria of statute, case law, regulatory opinion letters, client directive and professional imperative. Thus, a different business model emerges around prudent process, not investment products, which literally addresses and manages all the investment and administrative values required by regulatory mandate, client directive and professional imperative.
This is not you father’s Oldsmobile, it is an entirely different type of vehicle compliant to fiduciary standing. Those who do not wish to venture too far away from today’s “real world” conventional understanding of advice which can not be held to an objective fiduciary standard of care based on statute, case law, regulatory opinion letters, are in the advice business either (1) selling a product (no advice), (2) providing financial planning (needs based selling unless continuous and comprehensive in nature, which is technologically beyond the reach of 99% of under resouced advisors) or (3) selling advice as a product (the broker’s approach to advice) but they are not (4) providing fiduciary counsel (advice as a process the advisor manages with a statutory audit path and expert opinion letter).
Thus the REAL WORLD WOES are either (a) the absence of the enabling resources necessary to support fiduciary standing or (b) the presumption that advisors are actually now providing fiduciary counsel. Because you can’t have one without the other–it would seem the SEC which would like to support fiduciary standing would agree with Winks rather than Clark. If advisors are now fulfilling their fiduciary obligations based on objective criteria of statute, case law, regulatory opinion letters, They have nothing to fear. But in using objective criteria for fiduciary standing, they only have everything to gain by being properly resourced. I have not met many advisors (either RIAs or brokers) who believe they are there yet.
SCW
Interesting dialogue. Bob, this is based on my factual experience which is different from yours and Steve’s. I represent brokers & consumers in FINRA litigation as their expert. I look for facts and actual representations when representing my litigation client. Even with this empirical evidence the cases are seldom simple. Here’a partial list of things I see that create the “gray” area:
BROKERS-make representations in print that make them look stupid when things go wrong.
CLIENTS-sign everything put in front of them which later makes them look like they are willing to accept any level of risk.
BROKERS-are terrible recordkeepers of client meetings.
CLIENTS-think that their monthly brokerage statement is something to put in a ntoebook and never question the results of the statement.
BROKERS-are way to aggressive in their recommendations even when the client profiles as “moderate” or less.
CLIENTS-don’t understand the importance of the return “of” their money versus the return “on” their money.
BROKERS-mean well but are not trained to be objective advisors.
CLIENTS-just want someone to trust but don’t know what that means.
I frankly think that most of these “fiduciary” discussions are way off the mark and don’t add much to solving the issues on both sides.
Stanley,
I respectfully disagree, with the “off the mark” observation both as a manager and as an advisor. Upon reflection, you observations are focused on brokers rather than advisors.
As for advisors would you prefer no structure, no objective means to prove fiduciary standing, such as counseling advisors not to have investment policy statements because they can be used against you? You are correct to advise your clients not to acknowledge fiduciary standing unless they are ready to support it. The question is when firms are ready to support fiduciary standing, you do a disservice to your clients by maintaining that position and thwarding innovation.
Your observations may be well suited for brokers but are certainly not appropriate for advisors who are held to a fiduciary standard. I am sure you do not want to leave the impression that you are not preordained not to be pro advice, not to be pro consumer, not to be pro advisor, not to be pro restoring the faith and confidence of the investing public. It is perfectly fine to be pro broker, pro convention and status quo which regulators, leglislators and the investing public deem imperative for reform in the best interests of the consumer.
The challenge is you and the industry prefer todays outdated thinking based on outdated 70 year old regulation which all would agree is in great need of reform. I would suggest as food for thought that perhaps that it is convention and status quo that are outdated rather than real world solutions needed for brokers and advisors to truely act in the best interest of the consumer based on the objective criteria of statute, case law and regulatory opinion letters.
SCW
I wonder how the arguments and positions hold up or change if we re-frame the issue to the clients’ point of view rather than the advisor or broker. Want to see a client’s head turn sideways like my curious canine? Begin a conversation regarding suitability and fiduciary obligations. What? You are not obligated to act in my best interest all of the time? Isn’t that why I come to you?
Tim,
You are absolutely correct, the consumer should expect the advisor to act in their best interests, but brokerage firms deny their brokers the ability to act in that capacity and attorneys like Stanley counsel brokerage firms not to prpperly resource brokers so they can act ibn the client’s best interest.
It’s all about the best interests of the client not the self interest of the brokerage firm.
SCW