What’s in a Name?

Ethics of Financial Advising Years ago, the editor of a financial services trade magazine was explaining to a cub reporter the difference between wirehouse brokers and Registered Investment Advisors as defined by the The Investment Advisers Act of 1940. The major distinction, he stressed, was that stockbrokers were regulated by the (then) National Association of Securities Dealers (NASD), a self-regulatory agency that held them to what was called the suitability standard in selecting investment products to sell to clients. If they recommended investments that were not suited to the client’s investment objectives, risk tolerance, age, assets and income, they were subject to disciplinary action and could be penalized and fined.

RIAs, on the other hand, were regulated by the SEC (or in some cases the individual states) and held by law to what was called the Fiduciary standard, requiring them to always act in the clients’ best interests when offering financial planning advice that might (or might not) result in a purchase…not quite as cut-and-dried as “suitability”, perhaps, but certainly more responsive to the consumer. And enforced by the SEC (and/or States).

While the NASD has since evolved into FINRA and the Dodd Frank Wall Street Reform and Consumer Protection Act of 2011 hinted at harmonizing the two standards, congressional debate and influential lobbying have halted any real progress on that front.

As a result, that editor’s final comment is as true today as it ever was: “It really doesn’t matter what they’re called or what ‘standard’ the financial services professional is held to,” he said. “All that matters is their own ethics. If you’re not ethical, it doesn’t matter what your title is.”

So today may be time to examine just what the role of the fiduciary entails. And thanks to the pot stirred by Dodd Frank, new organizations representing the RIA constituency have been roused to action. One of the most vocal is The Institute for a Fiduciary Standard whose goal is to effect law defining the term.  Here are the six core duties the Institute identifies as Fiduciary:

  1. Serve in the client’s best interests.
  2. Act in the utmost good faith.
  3. Avoid conflicts of interest.
  4. Disclose all material facts and conflicts, and manage all material conflicts.
  5. Act prudently, with the care, skill and judgment of a professional.
  6. Control investment expenses.

Note that except for numbers 3 and 4, these are not exactly practices covered by compliance rules and regulations. They are qualities that can’t be taught, purchased or outsourced.  They won’t put an acronym after your name or get your name in the headlines!  They are either intrinsic to your professional value system─or they are not.

While the Congress dilly-dallies and the consumer remains confused and distrustful of the financial services industry, why not take a close look at the way you, your colleagues and your staff are doing business. If those six tenets describe the way your firm conducts itself, you are fulfilling your fiduciary role and can take pride in calling yourself a Fiduciary.

For more information on Summit Brokerage Services, an independent broker-dealer, visit www.joinsummit.com or contact us at (800) 354-5528.

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