Stark differences persist between brokerage practices and true fiduciary best practices, with the brokerage side co-opting the term fiduciary and redefining it to suit its interests, the Institute for the Fiduciary Standard says.
In a new white paper, the Washington, D.C.-based think tank takes aim at what it sees as persistent brokerage industry practices.
"Sales and advice should be separated by law," the institutes president, Knut Rostad, says, asserting that the brokerage industry rejects this idea. "That is the context for putting forth this white paper [to] identify principles that shouldnt be controversial."
The institute released the white paper, "Key Principles for Fiduciary Best Practices and an Emerging Profession," to coincide with its "Fiduciary September" slate of activities pertaining to the movement to apply a uniform fiduciary standard of behavior across the entire financial services industry.
The white paper makes these points:
1. Objectivity is essential to fiduciary investment advice.
Incentives, favors, benefits or compensation can reasonably be expected to impair objective advice. Compensation arrangements, which directly alter payment levels to advisors or brokers, depending on the investment strategy or product recommendations, are well-known. Many conflicts are less obvious. At its heart, loyalty to clients requires being sensitive to, and competent at, identifying and avoiding conflicts.
2. Simple disclosure is often ineffective.
Disclosure often does not work. "Investors usually do not sufficiently heed even the briefest, bluntest and clearest disclosure warnings of conflicts," says Daylian Cain, an assistant professor of organizational behavior at Yale University and an expert in conflicts of interest.
3. Disclosure is most apt to be effective when accompanied by detailed explanations and requiring the client's written acknowledgement.
Personal counseling can improve the effect of disclosure. No hard and fast rule can be set down as to an appropriate method for registrant to disclose," the paper quotes the SEC as saying. "The method and extent of disclosure depends upon the particular client involved. The investor who is not familiar with the practices of the securities business requires more extensive explanation than the informed investor. The explanation must be such, however, that the particular client is clearly advised and understands before the completion of each transaction.
4. Clients need to understand how fees and expenses are charged.
Prospective clients should be fully apprised of the total estimated fees and expenses. Clients should be fully apprised of the total actual fees and expenses and fees paid by any third party to the advisor.
5. Plain language is essential when making disclosures to clients.
Using plain language builds clients trust and confidence in the advisor. Incomplete or unclear language is harmful. Language designed to fulfill legal obligations that is understood only by attorneys is worse yet.
6. Falling short on any of the above can amount to fraud.
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