Welcome to RIDO Investment Ideas TV, the new home for neophyte entrepreneurs and small business owners. We are a full time television network with programs featuring investment ideas, investment advice and entrepreneur success stories. RIDO Investment Ideas is dedicated to the success of entrepreneurs and small business, because that is who we are.


Regulating the Givers of Advice



The SEC will weigh the merits of requiring brokers and insurance agents to act as fiduciaries when they offer personalized financial advice.

AMERICANS IN NEED OF investment advice may benefit from the new financial-reform act. But much depends on what the Securities and Exchange Commission will require of financial-services professionals. Will the commission force all advisors to follow the strictest standard of care, or will it continue to hold some to a lesser standard?

The new law directs the SEC to study the effectiveness of existing legal or regulatory standards of care for broker-dealers and investment advisors providing personal-investment advice, as well as legal or regulatory gaps, shortcomings or overlaps in the standard of care for broker-dealers and investment advisors.

In the interest of full disclosure, I am an investment advisor and a certified financial planner. An investment advisor is registered as such with a registered investment-advisor firm, just as a broker or registered representative is an individual registered with a broker-dealer. Some individuals are registered as both broker-dealers and as advisors.

It seems many clients are unaware of the differences, or of the impact they have upon investment advice.

Registered investment-advisor firms and their representatives are fiduciaries as set forth in the Investment Advisers Act of 1940. A fiduciary is an individual or entity that is legally obligated always to act in clients' best interests. Full disclosure of any conflicts of interest is also required in order to meet the fiduciary standard of client care.

Broker-dealers, insurance companies and their representatives typically aren't fiduciaries. Unless they are also investment advisors, they are held to a less-stringent standard. Their recommendations need only be "suitable," given the client's particular circumstances.

Financial products qualifying as suitable may, for example, have poor investment performance or high costs of ownership, or in other ways not represent the best choice for an investor.

If the mandated study—which is to take six months—reveals a need for broker-dealers to meet the fiduciary standard of care, the SEC is empowered to require that the higher standard be met by broker-dealers.

Greater disclosure would increase the likelihood that investors will become better educated about hidden fees associated with many financial products, enabling them to make better investment decisions and evaluate whether they are getting their money's worth for their investment-advice dollar.

Broker-dealers may also experience greater legal liability associated with meeting the fiduciary standard of client care. However, even though the SEC will have the rule-making authority to require broker-dealers to meet the same fiduciary standard of care required of investment advisors, the possibility exists that the SEC could apply a watered-down version of the fiduciary standard, specifically designed for broker-dealers.

IT STANDS TO REASON that all financial-services professionals offering personalized investment advice should be required to meet the fiduciary standard described in the 1940 Act. Anything less would continue to shortchange some investors, as recommendations would continue to be influenced by unidentified conflicts of interest.

To accept any argument to the contrary is to believe that failing to always act in clients' best interests is an acceptable practice. All medical doctors are required to meet the same standard of care, as are all attorneys. Why not all professionals providing personalized investment advice?

At a minimum, all Americans seeking investment advice should be afforded the peace of mind associated with transparent investment recommendations.

Of course, if a broker or insurance professional isn't providing personalized investment advice—if they are simply engaged in the sale of products—there is no need to impose the fiduciary standard.

Obviously, rules alone aren't enough to eliminate abuses. There are numerous examples of investment advisors and other fiduciaries cheating and stealing from their clients. Broker-dealers with a history of fair dealing and regulatory compliance should applaud the extension of the fiduciary standard. Conversely, those firms with less-impressive records may find it more difficult to defend themselves in the future.

The new law is by no means a panacea for those in need of investment advice. For instance, there is no mention of addressing the multitude of misleading job titles and professional designations. Moreover, the bill bars the SEC from overseeing equity-indexed annuities, which are products issued by insurance companies that guarantee a return that is linked to a particular stock index, such as the Standard & Poor's 500. These products have been the subject of repeated abuses by unscrupulous salespersons who receive hefty commissions by preying on the most vulnerable investors and saddling them with huge surrender charges, but they will continue to be regulated by state insurance departments.

The SEC's six-month study is the next step. The commission and its staff are likely to be deluged with advice, and all voices should be heard.

Most of those voices will be professional advocates for particular interests. Unfortunately, few individual investors are likely to respond to the study, for polls have indicated the majority of Americans believe that all financial-services professionals are required to place their clients' interests first.

American investors should speak up if they expect the SEC to give them greater protections when they receive personalized investment advice.

Editor's Note: Other Voices welcomes essays expressing different views on this topic. One essay will be selected for speedy publication from those that are submitted in the next two weeks.

ED MAHAFFY is the founder of ClientFirst Wealth Management, an independent fee-only registered investment advisor located in Little Rock, Ark.

OTHER VOICES essays should be about 1,000 words, and e-mailed to tg.donlan@barrons.com.

From Online Barrons published on SATURDAY, AUGUST 14, 2010