Some regulators are trying to get more clarity around the “culture” of different Wall Street and independent advisory firms. Apparently, it is difficult for the regulators to identify the subtle differences between firms that adhere to (and lobby for) a rigorous fiduciary standard, and those that offer seven-figure bonuses and periodically bet against the investment opportunities they sell to their customers.
There’s even talk about creating a questionnaire to help firms identify employees who might turn into regulatory time bombs.
Call me a cynic, but I suspect top producers at the independent B-Ds — even those whose idea of a sound portfolio is illiquid, high-commission, nontraded REITs — can find the “right” answer on a multiple-choice exam.
But maybe if the exam is cleverly worded, it could help regulators spot the differences between a clients-first fiduciary culture and an exploitative sales culture. In the spirit of cooperation, let me offer some sample questions that regulators are free to copy and use. (Readers, take the test yourself to see how you score.)
When clients act on my investment recommendations, their money is forwarded to:
A. My institutional custodian.
B. An insurance carrier recognizing the importance of commissions.
C. My brokerage firm’s latest proprietary product (which we’re actively shorting).
D. A numbered account at a private bank in Uruguay.
When I attended my most recent mandatory ethics class, I:
A. took notes.
B. fell asleep.
C. texted my lawyer.
D. stole the wallets of other attendees.
A sound investment philosophy should include:
A. diversification.
B. above-average commission compensation.
C. under-the-table shelf-space arrangements.
D. confiscation.
In my quarterly performance statements, I:
A. include appropriate benchmarking data.
B. apologize for the damage.
C. pray my clients won’t open them.
D. hope to win an award for creativity.
Since I began offering my investment management services, my personal net worth has:
A. risen as my business has grown.
B. increased dramatically once I found out about
20-year surrender charges.
C. fluctuated depending on the vigilance of my compliance department.
D. equaled my AUM.
My composite investment performance, since starting the firm, has been:
A. roughly equal to a blend of the indexes.
B. equal to the returns of high-cost funds minus mortality and expense charges.
C. awful, due to nontraded REIT problems.
D. whatever I want it to be.
I have a fiduciary duty to my clients when:
A. I create their financial plan and throughout the engagement.
B. I create their financial plan, after which I switch hats.
C. they haven’t yet signed my mandatory client agreement, which disclaims it away.
D. hell freezes over.
My own personal retirement plan consists of:
A. decades of careful savings plus the sale of my firm to successors.
B. trail commissions that follow me as long as my licenses are active.
C. semiannual upfront bonuses from switching firms.
D. a cell in a minimum security prison.
The biggest challenge to my firm’s future growth and prosperity is:
A. the uncertainty of the markets.
B. the incessant decline of commission revenue.
C. my compliance history catching up with me.
D. federal prosecution.
To me, a “culture of compliance” means:
A. strict checks and balances that protect clients’ assets and privacy.
B. keeping the home-office compliance department off my back.
C. selling the highest commission products I can justify as suitable.
D. not leaving a paper trail.
If SEC examiners made a surprise visit to my office, I would:
A. begin gathering the requested documentation.
B. contact my compliance department and attorney in alarm.
C. execute Operation C, which mostly consists of having key staff members hurriedly shred documents and delete files.
D. continue business as usual, because to those bozos, our operation looks totally legit.
If a new prospect, carrying what appears to be a shoulder-mounted missile launcher, brought me $10 million in small bills, I would:
A. explain that I can’t touch the money under anti-money laundering rules, and notify the SEC district office.
B. slowly dollar-cost-average the money into nontraded REITs.
C. demand $2 million and then ask how much more needs laundering.
D. create a bogus account, send periodic bogus statements and change my address.
Do I treat clients as I would my own mother?
A. Yes, in fact, my mother is a client.
B. Yes, I don’t particularly like my mother.
C. No, my mother is too smart to invest in the products I sell.
D. No, my mother has already threatened to turn me in to the feds.
If someone were to make me chairperson of the SEC and put me in charge of advisor regulation, I would:
A. seek ways to make the regulatory burden lighter and more meaningfully protective.
B. run things exactly as they are for a few years, and then sell my services to Wall Street.
C. expunge my own compliance records and see if brokerages would pay me to do the same for them.
D. resign immediately. There’s no money in being a regulator.
The difference between an investment advisor and a broker is that:
A. brokers are in the sales business, while investment advisors provide objective advice.
B. there is no difference. We all sell.
C. investment advisors are goody-goodies, but you can win trust more quickly and sell more if you pretend you’re one of them.
D. investment advisors are reformedbrokers who got sick of the sales culture and wanted the freedom to do what’s right for their clients. But a few of us go in the opposite direction.
SCORE YOURSELF
If you’re scoring at home or at your office, give yourself 10 points for every A answer, five for every B, zero for every C and subtract 10 for every D answer.
More than 150 points: I suspect you cheated, so you’re probably one of those Ponzi guys.
121-150 points: Good culture.
51-120 points: You’re probably experiencing a lot of brokerage and IBD recruiting activity.
0-50 points: You’re probably on a first-name basis with your compliance department.
Fewer than 0 points: I see incarceration in your future.
Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Follow him on Twitter at
Read more:
