An Open Letter to the U.S. Chamber of Commerce
Feb. 26, 2015
Tom Donahue, CEO
U.S. Chamber of Commerce
Mr. David Hirschmann
President, U.S. Chamber’s Center for Capital Markets Employee Benefits Competiveness
Mr. Randel Johnson
Senior Vice-President, U.S. Chamber of Commerce Labor Immigration and Benefits
Dear Mr. Donahue, Mr. Hischmann and Mr. Johnson:
I have observed the U.S. Chamber of Commerce undertake actions recently in apparent opposition to the U.S. Department of Labor’s (DOL's) (via its Employee Benefit Security Administration) (EBSA) re-proposal of its “Definition of Fiduciary” rule (a.k.a. “Conflicts of Interest” rule). The Chamber has suggested that the DOL should not redefine the fiduciary definition, and instead seek a more narrow approach. I believe the Chamber’s position is contrary to the concerns of the vast majority of the U.S. Chamber of Commerce’s members.
The fact of the matter is that the DOL/EBSA re-proposal of the "fiduciary" definition is critical to all businesses, and their owners, that sponsor a qualified retirement plan. Far too often, plan sponsors have been sued for "relying" upon the advice of non-fiduciary "retirement consultants." Yet, these "consultants" escape liability as they hide behind the low "suitability" standard for the “recommendations” they provided.
The burden on plan sponsors – business owners attuned to running their own businesses but rarely possessing a sophisticated knowledge of investments – is quite high. ERISA demands that fiduciaries act with the type of “care, skill, prudence, and diligence under the circumstances” not of a lay person, but of one experienced and knowledgeable with these matters. 29 U.S.C. § 1104(a)(1)(B). The purpose of this statute is for the protection of plan participants (including business owners and managers themselves). Yet, business owners and managers seldom possess the expertise to select investments for their defined contribution plans. Hence, they must turn to, and rely upon, expert advisors.
The real tragedy for plan sponsors occurs when private litigation arises against plan sponsors [including class action litigation by plan participants, made easier by recent court decisions. A perfect example is the Tibble v. Edison case currently before the U.S. Supreme Court. In this case the plan sponsor – a large business – faces immense liability (as well as litigation costs) due to its stated reliance on a non-fiduciary retirement plan consultant.
Additionally, largely in response to complaints by plan participants, a DOL audit is increasingly likely - and this can result in an enforcement action and/or restitution to plan participants. In both instances, the plan sponsor – businesses both large and small – are held to account.
Yet – here is the rub. In either instance, the plan sponsor has great difficulty holding the "retirement plan consultant" to account, given the low standard of conduct applicable to measure the potential liability of a non-fiduciary consultant. The plan sponsor is the victim of poor (and non-fiduciary) advice, in such cases, and has no effective remedy for the conflict-ridden recommendations it received. And most business owners don’t even realize that they cannot rely upon such non-fiduciary advisors.
Several other class action cases of this nature have already been settled, and more are pending. In each instance, if the U.S. Chamber of Commerce were to contact its member (the subject of the litigation, often bearing millions if not tens of millions of potential liability), that member would likely say: "The primary reason I, the plan sponsor, am subject to this suit, is because I did not work with a fiduciary retirement plan consultant. Although I thought I could rely upon the recommendations of this 'consultant,' and that they would be held to account for their recommendations, I came to find out that the 'consultant' is able to hide behind the low standard of 'suitability' for its recommendations. I am on the hook, while they escape liability for their conflict-ridden, poor advice."
While the Chamber's position appears to reflect Wall Street's fervent opposition to the DOL's proposed rule to broaden the applicability of fiduciary status, if the Chamber were to investigate it would find that many of Wall Street's views don't withstand scrutiny. See my prior blog post.
The U.S. Chamber of Commerce needs to rethink its position. Does the Chamber represent all business owners (many, if not most, of whom, are plan sponsors)? Or does the Chamber represent only a slim minority of the business world – who so often prey upon all of the other businesses? Does the Chamber want to assist its members - business owners and plan sponsors large and small?
American business owners desire to provide for the retirement security of their workers in the best way possible. The DOL's fiduciary rule-making is a huge step forward toward this goal. The DOL's fiduciary rule will empower plan sponsors - each of whom truly deserves expert, trusted fiduciary advisors who are, in turn, held accountable for their recommendations.
Ron A. Rhoades, JD, CFP®
Ron A. Rhoades is an attorney, investment adviser, Certified Financial Planner(tm), and professor of business law and finance. He will be joining the faculty of the Western Kentucky University Department of Finance in July 2015, where he will serve as Program Chair for its Financial Planning Program.
This blog post represents Ron's personal views, and are not necessarily those of any firm or organization or institution with whom he is associated. Ron may be reached via firstname.lastname@example.org.
Thursday, February 26, 2015
Monday, February 23, 2015
Wall Street’s lobbyists are now in full press mode as they attempt to stop the Department of Labor from issuing a proposed rule on conflicts of interest. While the text of the proposed rule is not even yet known, Wall Street knows that their best shot at stopping the DOL's proposed rule on conflicts of interest is that the rule never even sees the light of day.
Of course, these same lobbyists have previously stated that they embrace a “new federal fiduciary standard.” Hence, why are they objecting?
Let’s examine the three major arguments of these dozens of paid lobbyists and ascertain if they have any validity.
1. "Commissions Will Be Banned under the DOL’s Proposed Rule."
What’s interesting about this assertion is the fact that Asst. Sec. Phyllis Borzi has repeatedly (many, many times) addressed the issue, and has stated over and over again that commissions will not be banned.
Many fiduciary advocates believe commissions cannot be paid under ERISA’s fiduciary dictates and the prohibited transaction rules, nor under a fiduciary standard, generally. Yet, nothing in the common law of fiduciary standards (that I have been able to find) prohibits commission-based compensation. What is required is that any fees and costs paid by the client be reasonable for the services provided.
The DOL is likely to provide blanket exemptive relief to brokers who would become fiduciaries to defined contribution plans and IRA accounts under the new rules. The nature of that exemptive relief is unknown. There is likely to be a “seller’s exemption” – in which fiduciary obligations don’t apply to those who remain at arms-length with the plan sponsor / IRA account holder. For those to whom fiduciary standards do apply, there is likely to be an exemption from ERISA’s strict fiduciary standards for those who charge commissions for the provision of advice, rather than ongoing advisory fees or flat fees or hourly fees.
I would note that the DOL has not gone so far as Australia, New Zealand, England and some other regulators, who have largely negated the practice of charging commissions on any investment products (including many insurance products with investment components).
Might other problems exist for brokers acting as fiduciary advisors, other than mere payment of a commission? Perhaps, depending upon the text of the rule and the exemptive relief granted, or not granted. These potential problems include:
A) A problem exists whenever variable commissions exist, under a fiduciary standard. In other words, if one product can be provided for a commission of 3%, and other provided for a commission of 5%, the fiduciary must be prepared to justify (as the fiduciary will bear the burden or persuasion, if challenged) that the higher-commission product was better for the client. Often, this will be a tough burden of proof to meet. I believe it likely that product providers will offer retirement classes of shares with a fixed commission structure, and no breakpoints.
B) Another problem exists, however, if the same mutual fund offers share classes with lower fees. We have seen this over and over again in the courts, as plan sponsors (who are fiduciaries) are held to account. Often the plan sponsors state that they relied upon their non-fiduciary “retirement consultants” (as is the case in Tibble v. Edison, currently before the U.S. Supreme Court). The result is often that the plan sponsor is “on the hook” while the “retirement consultant” (a brokerage firm) is “off the hook” by hiding behind the very low and ineffective suitability standard. And therein lies the rub – large and small business owners are often left by non-fiduciary retirement consultants to fend for themselves in class action litigation, with no recourse against the brokerage firm.
A similar problem might exist if breakpoints are available, as is common for Class A mutual fund shares. Would breakpoints be provided based upon each individual participant’s plan contributions (or IRA rollover or contributions)? Or would breakpoints be provided based on the contributions of all participants to the plan? Why not the latter, at least for defined contribution plans, given that one of the advantages of such plans is the ability to exercise certain economies of scale.
C) Variable revenue-sharing payments, which provide additional compensation to brokerage firms who give a fund priority on their platform (called “payment for shelf space”) and/or were higher amounts are paid should certain levels of sales of a fund (or fund family) be attained, represent a dark corner for any fiduciary. This type of practice must likely be stopped – period.
D) Another problem exists with soft dollar compensation. Though permitted by statute, the SEC has largely been ineffective in insuring that soft dollars (higher commissions paid by mutual fund companies, out of the fund, in return for research) are reasonable in amount for the research actually provided, and that the research is actually utilized by the fund’s investment adviser(s) in making decisions. I suspect that the DOL will provide exemptions for soft dollar compensation, although I hope that they assert standards as to same. Given that bid-ask spreads and commissions have declined over the last several years, particularly as funds use electronic trading platforms (NYSE Arca and many others, including dark pools), one must question the continued justification for paying high commissions for securities trading undertaken by funds. I hope that DOL’s standards for exemptive relief reflect this present-day reality.
How can the brokers avoid these issues? Simple. If you desire to sell on a commission basis, sell funds specifically designed for the retirement market – no separate classes of shares, no breakpoints, fixed commission rates, no revenue-sharing, and no soft dollar compensation. In other words, avoid variable compensation.
Another solution is for brokers to just utilize no-load, no 12b-1 fee mutual funds and exchange-traded funds. Brokers might then negotiate a commission with the plan sponsor, each year. If small amounts are contributed to the plan, then larger commissions may be justified. If larger amounts are contributed, then smaller commissions might be justified. Commissions could be deducted directly from the contributions, not paid by the product providers. In my mind this is a far better solution than the “fixed commission” strategy previously mentioned, as it permits plan sponsors to negotiate compensation each year (thereby avoiding restraint of trade issues that might arise from fixed commission schedules).
While the brokerage and asset management industries may shout at the rooftops that such a solution is “too disruptive,” the industry has adopted before (e.g., largely getting rid of Class B shares). It can adapt again. Just get rid of variable compensation arrangements, and go to a negotiated commission arrangement, with fees deducted by the plan administrator/recordkeeper/custodian based upon contributions made to the plan. It’s a simple solution to the problem of commissions, which could be easily implemented.
2. "(Small) Consumers Will Not Be Able to Access Advice Under a Fiduciary Standard."
On Feb. 23, 2015, the National Association of Plan Advisors (NAPA) set forth their argument against the DOL’s conflict of interest rule, echoing what we have long heard from lobbyists from Wall Street (via SIFMA, FSI) and the insurance industry (NAIFA). NAPA stated:
“The best way to address concerns about ‘hidden’ fees is through better transparency, not by blocking 401(k) participants from working with the advisor of their choice,” [Brian Graff, Executive Director of the National Association of Plan Advisors (NAPA] explained. “If the administration moves forward with this proposed rule, American savers will be forced to pay out-of-pocket for their financial advice, or be limited to financial products with identical fees. Tens of millions of American savers who cannot afford to pay out-of-pocket will lose access to their financial advisor or be severely restricted in their choice of financial products. This is a wolf in sheep’s clothing. This so-called ‘conflict-of-interest’ rule is really the ‘No Advice’ rule.
“No advice means less retirement security. People who have had a financial advisor for 4-6 years have 58% more assets than those who have not, so it is not surprising that 80% of people feel more secure about retirement because they have worked with an advisor of their choice. The ‘No Advice’ rule can be dressed up to look like a consumer-friendly proposal, but when you look beneath the feel-good rhetoric, what you find is a dangerous regulatory overreach that should be stopped before it does serious harm to the retirement security of millions of working — and retired — Americans.“
This is perhaps Wall Street’s main argument in opposing the fiduciary standard. However, the evolution of financial advice over the past decade, and especially over the past few years as online investment advisors have blossomed, demonstrate that this is argument is the insurance company / broker-dealer acting as a “sheep in wolf’s clothing.” Let’s examine just a few of the developments.
First off, many fee-only financial advisors exist. Many of these (including those in the Garrett Planning Network, over 300 strong) charge hourly fees for advice. Others charge a flat fee for a financial plan, which might vary from a few hundred dollars to several thousand dollars (or more, depending upon the scope of issues addressed). Financial planning should be undertaken in a fiduciary capacity – even the SEC agrees with this. And often financial planning is an essential prerequisite prior to the delivery of investment recommendations.
Let me provide an example. Suppose a client comes into an “investments” firm with $20,000 to invest. A broker might sell the customer a Class A mutual fund, with a 5.75% sales load, resulting in compensation to the brokerage firm of $1,150 (plus, in all likelihood, 12b-1 fees of 0.25% annually, plus possible payments for shelf space, plus payments of marketing expenses for client educational seminars or brokers’ educational activities). Yet, if the client went to a fee-only advisor, that client would likely receive a comprehensive financial plan. This plan might advise that the client needs to first maximize contributions to her or his defined contribution plan, to get the employer match. Or the client may need to establish as cash reserve with all or some of the money, or pay off debts which possess high interest rates. And, even if the client is provided advice to invest in mutual funds, the recommendations are likely to be funds which are low-cost, no-load, no 12b-1 fees.
In essence, for the same fee, the client has received far more, and far better, advice, from a fee-only advisor than from a broker.
Brokers will yell that investment advisers, particularly of the fee-only variety, don’t work with small clients. Yet, there are two major fallacies to this argument.
First, most brokers don’t work with small clients. Instead, smaller clients are referred to “call centers” and investment products sold to them, typically on a commission basis. Many of the larger brokerage firms possess minimums of $100,000 to $250,000 to work with a broker, face-to-face. Of course, some investment advisory firms also possess minimums. And in both business models – brokers and investment advisers – there are those “financial advisors” (however licensed), including teams of advisors, who will establish their minimums much higher (often at levels of $1M, $5M, $10M, $20M, and even higher).
Second, and most importantly, there are many, many investment advisory firms that work with small clients, and have very low or no minimums. Betterment, LLC, charges an annual fee of only 0.35% on the first $10,000 invested, with a ten dollar minimum initial deposit. $10! – That’s it! Fees go down to 0.15%, depending on the total amount managed. While fund fees are in addition, the firm generally selects very low-fee broad market index exchange-traded funds. And – here’s the key – ongoing investment advice is provided, not just a one-shot “invest in this” arrangement (such as typically comes with commission-based compensation). The firm has tens of thousands of clients (as of a year ago, and they have more than doubled in size since then).
Look also at the XY Planning Network. Clients can get fee-only advice on an ongoing basis for a low, fixed monthly retainer. None of the advisors require a minimum amount to invest. While all advisors on the platform offer monthly retainer fees, many of the advisors also offer investment advice for a flat fee, hourly fees, or a percentage of assets under management.
There are many, many other examples of firms that serve both plan participants, as well as IRA account owners, while being subject to a fiduciary standard of conduct at all times.
The fact of the matter is that advisory fees have been under tremendous pressure. Technology has enabled efficiencies of scale to develop for the delivery of both financial and investment advice.
So why is the anti-fiduciary crowd yelling so much, that small investors cannot be served? Perhaps it is this – Wall Street’s brokerage firms and the insurance companies cannot extract (through commissions, 12b-1 fees, and/or other forms revenue-sharing payments) the excessive rents which their business model appears to require. Perhaps they are unwilling to compete on price.
Yet, the sad fact, as many, many an academic researcher has noted, is that the greater the fees and costs extracted by the financial intermediaries, the lower the returns the investor – plan participants and IRA account owners in this instance, will achieve.
But wait, they say. All that is needed is “disclosure” of fees, costs, and conflicts of interest. Yet, study after study has found that individual investors, even when provided with financial literacy education, seldom read disclosures and – even if read – seldom understand them. There are many, many behavioral biases which individual investors possess which negate the effectiveness of disclosures.
By way of further explanation, academic researchers have long known that emotional biases limit consumers’ ability to close the knowledge gap. Recent insights from behavioral science call into substantial doubt some cherished pro-regulatory strategies, including the view that if regulators force delivery of better disclosures and transparency to investors that this information can be used effectively.
Note as well that, as observed by Professors Stephen J. Choi and A.C. Pritchard, “instead of leading investors away from their behavioral biases, financial professionals may prey upon investors’ behavioral quirks … Having placed their trust in their brokers, investors may give them substantial leeway, opening the door to opportunistic behavior by brokers, who may steer investors toward poor or inappropriate investments.” Stephen J. Choi and A.C. Pritchard, “Behavioral Economics and the SEC” (2003), at p.18.
Moreover, Robert Prentice, who researches ethical decision making, writes, “not only can marketers who are familiar with behavioral research manipulate consumers by taking advantage of weaknesses in human cognition, but … competitive pressures almost guarantee that they will do so.” Robert Prentice, “Contract-Based Defenses In Securities Fraud Litigation: A Behavioral Analysis,” 2003 U.Ill.L.Rev. 337, 343-4 (2003), citing Jon D. Hanson & Douglas A. Kysar, “Taking Behavioralism Seriously: The Problem of Market Manipulation,” 74 N.Y.U.L.REV. 630 (1999) and citing Jon D. Hanson & Douglas A. Kysar, “Taking Behavioralism Seriously: Some Evidence of Market Manipulation,” 112 Harv.L.Rev. 1420 (1999).
As a result, much of the training of registered representatives of broker-dealer firms and of insurance agents involves how to establish a relationship of trust and confidence with the client. Once a relationship of trust is formed, customers will generally accede to the recommendations made by the registered representative, even if a bevy of disclosures is presented to them.
As Yale University Professor Daylian Cain, Carnegie Mellon Professor George Loewenstein, and Univ. Cal. Berkeley Prof. Don Moore have observed, “sunlight fails to disinfect.” Cain, Daylian M. and Loewenstein, George and Moore, Don A., When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest (July 7, 2010). Journal of Consumer Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1635819.
Perhaps that’s why Wall Street embraces this new “federal fiduciary standard” – which is really just “suitability” plus “casual disclosure” of fees, costs and conflicts of interest via web sites that must be first be accessed by investors (rather than disclosures provided to them). Because Wall Street knows that disclosures don’t work.
Let’s put the arguments of SIFMA, FSI, NAIFA, NAPA and some many other paid lobbyists to rest. Simply put, small investors ARE BEING SERVED now under a fiduciary standard. Don’t state otherwise – it just makes you look foolish and deceitful.
And another thing – to those members of SIFMA, etc., who continue to oppose fiduciary duties. Just because your business model doesn’t permit you to extract excessive rents from Americans should a fiduciary standard be imposed, and just because you can’t compete in a fiduciary landscape using your current business model, does NOT mean that your business model needs to be preserved. Get with the times. Your very expensive “cheese” is being moved. It’s time for you to adapt, or perish. (Of course, perish seems more likely. For even as Wall Street with its expensive marketing channels has tried to delay and stymie regulatory reforms, which seek to foster competition in the best interests of customers, the Wall Street broker-dealer firms and the insurance companies continue to lose market share to fiduciary advice providers – a little bit each year.)
3. "The SEC and DOL Should Coordinate, and the SEC Should Go First."
ERISA’s “sole interests” fiduciary standard augmented by prohibited transaction rules (under which exemptive relief can be granted provided the exemption is in the “best interests” of the plan participant) is different from the Advisers’ Act “best interests” fiduciary standard.
The fact exists, that in the current Administration, Wall Street and the insurance companies don’t appear to possess a great deal of influence with the tough and determined Phyllis Borzi and her team of capable staffers in the Employee Benefits Security Administration (EBSA, which is part of the DOL). However, due to the “revolving door” for staffers at the SEC, and several other other reasons, Wall Street has a much better chance of “regulatory capture” of the SEC’s rule-making process. Much depends upon SEC Chair’s Mary Jo White ability to resist Wall Street’s influence at the SEC; this is difficult for her considering that many of her key staff worked on Wall Street, or for law firms that represented Wall Street’s interests. Staff tend to heavily influence rule-making processes at the SEC, unless the Chair and at least two commissioners are exceptional at resisting the subtle, and not-so-subtle, influences at work.
Wall Street’s and the insurance industry’s lobbyists are suggesting that the SEC should “go first,” or that the DOL and SEC proceed only at the same time. Why? What rationale exists, for one to go before the other, or for both to go at the same time, when the very laws that govern their standards are different, and the standards themselves are different?
This is a stall tactic, plain and simple. And, in Congress, it’s not just a tactic designed to stall. The bill previously introduced to let the SEC proceed first, under this stall tactic, included such onerous requirements and restrictions as the bill's sponsors would have effectively halted, in place, any rule-making, not just at the DOL but also at the SEC, on the fiduciary standard. This is what Wall Street's lobbyists really want, even more than delay through obfuscation.
Wall Street and the insurance lobbies are spending tens of millions of dollars (if not hundreds of millions of dollars) to stop the DOL’s fiduciary rulemaking, and to influence the potential application of fiduciary standards by the SEC upon brokers who have chosen to provide “personalized investment advice.” Much of these funds are being spent promoting untruths and falsities.
Under close examination the major arguments Wall Street and the insurance lobbies make don’t withstand scrutiny. They don’t reflect reality.
The reality is, they are up in arms because their business model cannot compete. Wall Street and the insurance companies do not want rulemaking to occur which will foster competition on an even playing field.
Wall Street screams that any proposal must be “business model neutral.” Yet this in itself is a fallacy. For the fiduciary standard, at its core, is a restraint on greed. If the business model contains so many economic levers which encourage greed, via multiple conflicts of interest, it will not survive in a fiduciary environment. Wall Street must change its ways. In so doing, Wall Street must accept the fact that our fellow Americans care far more about their own financial security than Wall Street’s huge diversion of the returns of the capital markets into its coffers.
The battlegrounds in these fiduciary wars are many. Given the extremely heavily monied and very influential lobbyists from Wall Street and the insurance companies, and their sheer number, the relatively few fiduciary advocates have an uphill battle ahead of them – even with support from the White House.
Can you assist in these battles? Send a fax or letter to your U.S. Senators and U.S. Representatives today. Ask them to deny these attempt, through positions proven wrong, to stifle the fiduciary standard and the fair competition which results thereunder. Ask them to protect individual Americans, rather than through legislation preserve a business model in which the American consumer is fleeced via multiple conflicts of interest and often-hidden compensation. Ask your Senators and Representative to better secure the financial future of our fellow citizens, rather than preserve, at Wall Street’s urging, a business model which an informed modern consumer neither needs nor desires.
Ron A. Rhoades, JD, CFP(r) is a Professor of Business at Alfred State College, Alfred, NY. In July 2015 he will be joining the faculty of the Finance Department at Western Kentucky University, where he will chair its vibrant Financial Planning Program. This article represents the author's own views, and not any organization, firm, or institution with whom he is associated. Ron may be reached via e-mail at: RhoadeRA@AlfredState.edu.
Friday, February 20, 2015
Introduction ... An Economic War is Taking Place
Fiduciary advocates tend to question the motives of those who oppose fiduciary standards. There is some reason for this ... the imposition of fiduciary duties, at its core, acts as a restraint on greed. The application of the fiduciary standard can (and nearly always does) lower fees and costs for individual investors. As a consequence, this decreases the revenue - in a major way - of investment product manufacturers (asset managers) and distributors (Wall Street's brokers, who act as representatives of the product manufacturer).
There is no doubt (among fiduciary advocates, and nearly all academics who have studied this issue) that the impositon of a bona fide fiduciary standard of conduct will reduce the revenues of Wall Street's investment banks, and brokers, substantially over time. This - in my mind - in the major reason Wall Street opposes the DOL's re-proposal of its "definition of fiduciary" (conflicts of interest) rule, as well as any efforts by the SEC to apply fiduciary standards upon those who provide personalized investment advice. And, in my view, this is the reason that Wall Street seeks to eviscerate the true fiduciary standard, transforming it into a "casual disclosure-only" requirement on top of the ineffective "suitability" rule. Given Wall Street's huge economic interest in preserving a product sales mode that many see as a dinosaur, from the extinction event of imposition of fiduciary standards, it is very plausible (and likely) that objections to the fiduciary standard are driven mostly by efforts to preserve a flawed, ancient business model which is neither desired by knowledgeable consumers nor favorable to their financial security.
Yet, fiduciary advocates cannot ignore that another reason may exist for those who advocate against fiduciary standards. Perhaps some who oppose fiduciary standards believe that government has no role in imposing standards of conduct. Of course, we impose (by law and regulation) fiduciary standards in other situations in which vast informaton assymetry exists in advisory relationships, such as the relationship between a lawyer in her or his client. One would ask, why would we not impose fiduicary standards for the delivery of personalized financial and investment advice, in this ever-more-complex financial world of today, when dealing with such an important matter as Americans' future financial security? As we will see below, there are substantial public policy reasons which substantiate the need for the application of fiduciary standards.
Fiduciary advocates are also correct in pointing out that the actions they request of the U.S. Department of Labor / EBSA and of the SEC simply reflect the reality that brokers have, over the past 40 years (since the repeal of fixed commission rates in 1975), slowly moved into the advisory space. Yet, despite the fact that it is the broker's practices that have morphed from selling securities to providing advice, these same brokers resist the application of fiduciary standards. As will be shown below, the common law has, for well over a century, imposed fiduciary status upon those who provide advice in a relationship in which trust and confidence is reposed by the client. State law varies as to when fiduciary status arises, but many state courts hold brokers who provide personalized investment advice in a relationship of trust and confidence to the fiduciary standard - regardless of whether the broker is exempt from registration as an investment adviser.
Also, we must question whether those who hold out as trusted advisors - by using titles which imply a relationship of trust and confidence - should be held to account. Otherwise, a great deception of consumers occurs.
An economic war is taking place, pitting the manufacturers and sellers of investment products (Wall Street and the insurance companies) against Main Street - consumers who so strongly desire to be served by trusted advisors. Battlegrounds in this war are many, and include (but are not limited to) a proposed rule which is forthcoming from the U.S. Department of Labor ("definition of fiduciary / conflicts of interest rule") and at the SEC (which is seeking to determine whether to act).
As this economic war continues, let us examine some of the core issues involved, with a eye to discerning truth and understanding the compelling rationale for the imposition of fiduciary status.
The Ongoing Battle Between Freedom of Contract and Paternalism.
Throughout American society there exists a tension between two fundamental sets of beliefs. On one side is the staunch believe that freedom of contract is fundamental, that persons should take responsibility for their own actions, and if persons act stupidly (and enter "dumb bargains") then so be it.
On the other side is the belief that there are certain things so important to our society, such as the retirement security of our fellow Americans, that individuals with a great disparity in knowledge compared to the purveyors of products they deal with should possess a trusted guide, and that government should enforce this by specifying that such guides should act in a paternalistic manner (i.e., keeping best interests of the client foremost).
Both sides often ignore the fact that there is room for both. Not everyone needs nor wants a trusted advisor; a few consumers desire to "go it alone" and do their own research. Yet, those who desire a trusted advisor (which is the vast majority of Americans) want an advisor who truly stands in the shoes of the client, as a fiduciary, at all times. And consumers also desire to be able to "judge a book by its cover" - i.e., when someone uses a title which denotes a relationship of trust and confidence, they want to be able to have confidence that such person is acting in their best interests.
Yet, opponents of the fiduciary standard will proclaim that government regulation should be avoided, at all costs. However, as will be seen below, imposition of a fiduciary standard will reduce the number of regulations.
But let use first examine the compelling rationale which exists for the imposition of fiduciary status upon all those who provide personalized investment advice. In so doing we find that fiduciary standards are imposed as a result of sensible public policy.
Public Policy Reasons for Fiduciary Standards
The key to understanding fiduciary principles, and why, when and how they are applied, rests in first discerning the various public policy objectives the fiduciary standard of conduct is designed to meet. Too often the absence of discussion of these public policy objectives undermines the understanding, by policy makers, of the need for the imposition of fiduciary standards.
Fiduciary Status Addresses “Overreaching” When Person-To-Person Advice is Provided
The Investment Advisers Act of 1940 ("Advisers Act") embodied state common law's existing application of the fiduciary standard of conduct to those providing personalized investment advice. State common law continues to apply this standard to those who provide personalized investment advice and whom are in relatinoships of trust and confidence with their clients.
The U.S. Supreme Court stated that the Advisers Act “recognizes that, with respect to a certain class of investment advisers, a type of personalized relationship may exist with their clients … The essential purpose of [the Advisers Act] is to protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts and to safeguard the honest investment adviser against the stigma of the activities of these individuals by making fraudulent practices by investment advisers unlawful.” “The Act was designed to apply to those persons engaged in the investment-advisory profession -- those who provide personalized advice attuned to a client's concerns, whether by written or verbal communication … The dangers of fraud, deception, or overreaching that motivated the enactment of the statute are present in personalized communications ….”
Consumers’ Lack of Desire to Expend Time and Resources on Monitoring
The inability of clients to protect themselves while receiving guidance from a fiduciary does not arise solely due to a significant knowledge gap or due to the inability to expend funds for monitoring of the fiduciary.
Even highly knowledgeable and sophisticated clients (including many financial institutions) rely upon fiduciaries. While they may possess the financial resources to engage in stringent monitoring, and may even possess the requisite knowledge and skill to undertake monitoring themselves, the expenditure of time and money to undertake monitoring would deprive the investors of time to engage in other activities. Indeed, since sophisticated and wealthy investors have the ability to protect themselves, one might argue they might as well manage their investments themselves and save the fees. Yet, reliance upon fiduciaries is undertaken by wealthy and highly knowledgeable investors and without expenditures of time and money for monitoring of the fiduciary. In this manner, “fiduciary duties are linked to a social structure that values specialization of talents and functions.” Tamar Frankel, Ch. 12, United States Mutual Fund Investors, Their Managers and Distributors, in Conflicts Of Interest: Corporate Governance And Financial Markets(Kluwer Law International, The Netherlands, 2007), edited by Luc Thévenoz and Rashid Barhar.
The Shifting of Monitoring Costs to Government
In service provider relationships which arise to the level of fiduciary relations, it is highly costly for the client to monitor, verify and ensure that the fiduciary will abide by the fiduciary’s promise and deal with the entrusted power only for the benefit of the client. Indeed, if a client could easily protect himself or herself from an abuse of the fiduciary advisor’s power, authority, or delegation of trust, then there would be no need for imposition of fiduciary duties. Hence, fiduciary status is imposed as a means of aiding consumers in navigating the complex financial world, by enabling trust to be placed in the advisor by the client.
Fiduciary relationships are relationships in which the fiduciary provides to the client a service that public policy encourages. When such services are provided, the law recognizes that the client does not possess the ability, except at great cost, to monitor the exercise of the fiduciary’s powers. Usually the client cannot afford the expense of engaging separate counsel or experts to monitor the conflicts of interest the person in the superior position will possess, as such costs might outweigh the benefits the client receives from the relationship with the fiduciary. Enforcement of the protections thereby afforded to the client by the presence of fiduciary duties is shifted to the courts and/or to regulatory bodies. Accordingly, a significant portion of the cost of enforcement of fiduciary duties is shifted from individual clients to the taxpayers, although licensing and related fees, as well as fines, may shift monitoring costs back to all of the fiduciaries which are regulated.
Consumers’ Difficulty in Tying Performance to Results
The results of the services provided by a fiduciary advisor are not always related to the honesty of the fiduciary or the quality of the services. For example, an investment adviser may be both honest and diligent, but the value of the client’s portfolio may fall as the result of market events. Indeed, rare is the instance in which an investment adviser provides substantial positive returns for each incremental period over long periods of time – and in such instances the honesty of the investment adviser should be suspect (as was the situation with Madoff).
Consumers’ Difficulty in Identifying and Understanding Conflicts Of Interest
Most individual consumers of financial services in America today are unable to identify and understand the many conflicts of interest which can exist in financial services. For example, a customer of a broker-dealer firm might be aware of the existence of a commission for the sale of a mutual fund, but possess no understanding that there are many mutual funds available which are available without commissions (i.e., sales loads). Moreover, brokerage firms have evolved into successful disguisers of conflicts of interest arising from third-party payments, including payments through such mechanisms as contingent deferred sales charges, 12b-1 fees, payment for order flow, payment for shelf space, and soft dollar compensation.
Survey after survey (including the Rand Report) has concluded that consumers place a very high degree of trust and confidence in their investment adviser, stockbroker, or financial planner. These consumers deal with their advisors on unequal terms, and often are unable to identify the conflicts of interest their “financial consultants” possess. As evidence of the lack of knowledge possessed by consumers, the Rand Report noted that 30% of investors believed that they did not pay their financial consultant any fees! This calls into substantial question the conclusion derived from the Rand Report’s survey that most customers of brokers are happy with their financial consultant.
Transparency is important, but even when compensation is fully disclosed, few individual investors realize the impact high fees and costs can possess on their long-term investment returns; often individual investors believe that a more expensive product will possess higher returns.
For Fiduciaries the Cost of Proving Trustworthiness Is Quite High
How does one prove one to be “honest” and “loyal”? The cost to a fiduciary in proving that the advisor is trustworthy could be extremely high – so high as to exceed the compensation gained from the relationships with the advisors’ clients.
In his influential article discussing the creation of the federal securities acts, and in particular their moral purpose, John Walsh (of the SEC’s OCIE) reviewed the legislative history underlying the creation of the Investment Advisers Act:
· As part of a congressionally mandated review of investment trusts the agency also studied investment advisers. The Advisers Act was based on that study. By the time it passed, it was a consensus measure having the support of virtually all advisers.
· Investment advisers’ professionalism, and particularly their professional ethics, dominated the SEC study and the legislative history of the Act. Industry spokespersons emphasized their professionalism. The “function of the profession of investment counsel,” they said, “was to render to clients on a personal basis competent, unbiased and continuous advice regarding the sound management of their investments.” In terms of their professionalism they compared themselves to physicians and lawyers. However, industry spokespersons indicated that their efforts to maintain professional standards had encountered a serious problem. The industry, they said, covered “the entire range from the fellow without competence and without conscience at one end of the scale, to the capable, well-trained, utterly unbiased man or firm, trying to render a purely professional service, at the other end.” Recognizing this range, “a group of people in the forefront of the profession realized that if professional standards were to be maintained, there must be some kind of public formulation of a standard or a code of ethics.” As a result, the Investment Counsel Association of America was organized and issued a Code of Ethics. Nonetheless, the problem remained that the Association could not police the conduct of those who were not members nor did it have any punitive power.
· The SEC Study noted that it had been the unanimous opinion of all who had testified at its public examination, both members and nonmembers of the Association, that the industry’s voluntary efforts could not cope with the “most elemental and fundamental problem of the investment counsel industry—the investment counsel ‘fringe’ which includes those incompetent and unethical individuals or organizations who represent themselves as bona fide investment counselors.” Advisers of that type would not voluntarily submit to supervision or policing. Yet, all counselors suffered from the stigma placed on the activities of the individuals on the fringe. Thus, an agency was needed with compulsory and national power that could compel the fringe to conform to ethical standards.
· As a result of the Commission’s report to Congress, the Senate Committee on Banking and Currency determined that a solution to the problems of investment advisory services could not be affected without federal legislation. In addition, both the Senate and House Committees considering the legislation determined that it was needed not only to protect the public, but also to protect bona fide investment counselors from the stigma attached to the activities of unscrupulous tipsters and touts. During the debate in Congress, the special professional relationship between advisers and their clients was recognized. It is, said one representative, “somewhat [like that] of a physician to his patient.” The same Congressman continued that members of the profession were “to be complimented for their desire to improve the status of their profession and to improve its quality.”
This is why it is important to fiduciary advisors to be able to distinguish themselves from non-fiduciaries. A recent example of the problems faced by investment advisers was the “fee-based brokerage accounts” final rule adopted by the SEC in 2005, which would have permitted brokers to provide the same functional investment advisory services as investment advisers but without application of fiduciary standards of conduct. This would have negated to a large degree economic incentives for persons to become investment advisers and be subject to the higher standard of conduct. The SEC’s fee-based accounts rule was overturned in Financial Planning Ass'n v. S.E.C., 482 F.3d 481 (D.C. Cir., 2007).
Monitoring and Reputational Threats are Largely Ineffective
The ability of “the market” to monitor and enforce a fiduciary’s obligations, such as through the compulsion to preserve a firm’s reputation, is often ineffective in fiduciary relationships. This is because revelations about abuses of trust by fiduciaries can be well hidden (such as through mandatory arbitration clauses and secrecy agreements regarding settlements), or because marketing efforts by fiduciary firms are so strong and pervasive that they overwhelm the reported instances of breaches of fiduciary duties.
Public Policy Encourages Specialization, Which Necessitates Fiduciary Duties
As Professor Tamar Frankel, long the leading scholar in the area of fiduciary law as applied to securities regulation, once noted: “[A] prosperous economy develops specialization. Specialization requires interdependence. And interdependence cannot exist without a measure of trusting. In an entirely non-trusting relationship interaction would be too expensive and too risky to maintain. Studies have shown a correlation between the level of trusting relationships on which members of a society operate and the level of that society’s trade and economic prosperity.”
Fiduciary duties are imposed by law when public policy encourages specialization in particular services, such as investment management or law, in recognition of the value such services provide to our society. For example, the provision of investment consulting services under fiduciary duties of loyalty and due care encourages participation by investors in our capital markets system. Hence, in order to promote public policy goals, the law requires the imposition of fiduciary status upon the party in the dominant position. Through the imposition of such fiduciary status the client is thereby afforded various protections. These protections serve to reduce the risks to the client which relate to the service, and encourage the client to utilize the service. Fiduciary status thereby furthers the public interest.
Public Policy Encourages Participation in our Capital Markets
Investment advisory services encourage participation by investors in our capital markets system, which in turn promotes economic growth. The first and overriding responsibility any financial professional has is to all of the participants of the market. This primary obligation is required in order to maintain the perception and reality that the market is a fair game and thus encourage the widest possible participation in the capital allocation process. The premise of the U.S. capital market is that the widest possible participation in the market will result in the most efficient allocation of financial resources and, therefore, will lead to the best operation of the U.S. and world-wide economy. Indeed, academic research has revealed that individual investors who are unable to trust their financial advisors are less likely to participate in the capital markets.
As stated in a 2002 white paper authored by Professor Macy: “If people do not make careful, rational decisions about how to self-regulate the patterns of consumption and savings and investment over their life cycles, government will have to step in to save people from the consequences of their poor planning. Indeed the entire concept of government-sponsored, forced withholding for retirement (Social Security) is based on the assumption that people lack the foresight or the discipline, or the expertise to plan for themselves. The weaknesses in government-sponsored social security and retirement systems places increased importance on the ability of people to secure for themselves adequate financial planning.”
Imposing Fiduciary Standards Decreases the Need for Government Rule-Making
In the political climate of Washington, several members of the U.S. Congress in 2014 urged the U.S. Department of Labor and the U.S. Securities and Exchange Commission, both empowered by law to apply the fiduciary standard, to either slow down or stop their fiduciary rule-making efforts altogether. Often the reason expressed is concerns about the imposition of more government regulation, as well as reservations about the growth of the size of government. Yet, the contrary result is far more likely, as imposing bona fide fiduciary obligations will likely reduce both the number of government regulations and hold down the size of government. It will also foster the marketplace policing Wall Street, itself, thus substantially reducing the likelihood of the abuses which led to the financial crisis of 2008-9. Please permit me to explain.
One must initially understand the culture of true fiduciary advisors. Equipped with an agreement with their clients for reasonable, professional compensation, they utilize their expertise by “stepping into the shoes” of their clients. They act, at all times and without exception, as the representative of their client. They undertake this sacred obligation of trust zealously, with the due care of an expert, and acting with loyalty and utmost good faith at all times. Fiduciary advisors eschew opportunities for further compensation or other self-benefit, acting always to serve their client, and only their client. Fiduciary advisors possess an undivided loyalty to their clients at all times, and without exception.
Despite its overriding simplicity, many of those in Wall Street fail to understand the fiduciary standard of conduct. In my many discussions with Wall Street executives, they approach the issue from the standpoint of whether disclosures of conflicts of interest must occur (knowing all well that disclosures are ineffective as a means of consumer protection). So engrained are they in a sales culture, in which you “eat what you kill,” they cannot conceptualize, in their own minds, the true nature of the fiduciary standard.
In fact, I have observed many a stockbroker (i.e., “broker” or “registered representative of a broker-dealer firm”) depart from that environment to join fee-only fiduciary investment advisory firms, only to be asked to leave several months later. Their mindset was incapable of change, and hence – not able to adhere to the strict ethics of a fiduciary advisor – they were asked to leave.
Perhaps these brokers who then became “failed fiduciaries” should have received a better explanation of the fiduciary standard. In dictum in the 1998 English (U.K.) case of Bristol and West Building Society v. Matthew, Lord Millet undertook what has been described as a “masterful survey” of the fiduciary principle: “A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principle is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of the fiduciary obligations. They are the defining characteristics of a fiduciary.”
While I admire Lord Millet’s prose, permit me to say it more directly: A fiduciary steps into the shoes of another person and applies all of her or his knowledge and skill to benefit that person as if she or he were that person. This is the essence of the fiduciary relationship.
So how does the application of fiduciary principles translate into a reduced size of government regulations, and a reduced size for government itself, and the policing of Wall Street?
First, the fiduciary standard is a principles-based standard. The fiduciary standard of conduct can be succinctly expressed as either “acting in the best interests of the client” or “acting with due care, loyalty and utmost good faith” (the “triad” of fiduciary duties often recited by U.S. courts. While further elicitations of the standard can be useful as guides to both fiduciary advisors and their clients, they are not absolutely necessary. In other words, unlike the regulatory scheme for non-fiduciary broker-dealers, where there exist a bevy of highly specific conduct rules governing what can and what cannot be done, there exists no compelling need for detailed rules to govern the conduct of fiduciaries.
Indeed, a detailed set of rules attempting to delineate fiduciary principles could prove to be counter-productive. Fraud is infinite, and the fiduciary standard of conduct must be free to combat fraud. Accordingly, the fiduciary standard must be permitted to evolve. While the fiduciary standard of conduct for investment advisers and personal financial planners is generally uniform, fiduciary duties are not static; rather, they must evolve over time to meet the ever-changing business practices of investment advisers and to ensure that fraudulent conduct is successfully circumscribed. Because fraud is by its very nature boundless, the one fiduciary standard of conduct applicable to investment advisers should not be subjected to attempts to define or restrict it legislatively, by means of any particular definition.
Second, less oversight is required of fiduciaries – once the culture is engrained. SEC and FINRA examiners of Wall Street’s broker-dealer firms often camp out for weeks and weeks when conducting regular visits to those firms. Why? As the SEC has long acknowledged, the sales culture and merchandizing aspects of the broker-dealer model, with its tendency to disguise obscure fees and costs where possible and with its many, many conflicts of interest, can easily lead to transgressions of the many conduct rules applicable to broker-dealers. As a result, thousands and thousands of registered representatives of broker-dealers are fined, or brought into arbitration proceedings by their clients, each and every year.
Yet, if a bona fide fiduciary culture is instilled, the need for such stringent government oversight is substantially lessened. For example, attorneys-at-law are fiduciaries, and their exist hundreds of thousands of them. Yet, I am not aware of any state that conducts routine periodic examinations of lawyers. Instead, the existence of the fiduciary culture is embedded through training and tradition within the legal community, and peer pressure exists to adhere to fiduciary principles, resulting in few transgressions. What problems that do emerge are resolved by a relatively small handful of investigative staff employed by the states, as well as through private civil litigation.
I’m not stating that fiduciary investment advisers and brokers (if fiduciary standards are applied by rule to them) do not need any routine examinations. Unlike most attorneys (and CPAs), some investment advisers (as well as nearly all broker-dealers) accept “custody” of their client assets. It is an essential government function to verify that customers’ assets actually exist; frequent inspections of custody arrangements are essential to ensure that small frauds don’t become huge ones. Yet, such inspections need not take weeks, for routine examinations seldom uncover Ponzi schemes and other thefts of client assets. Rather, most frauds involving custody are detected after a complaint from a client or from a concerned employee. A smart examination would spot check high-risk firms frequently, and for all firms would reach out to employees to encourage whistle-blowing for any actual fraud. And such limited, one-day examinations would occur more frequently, in recognition of the fact that most Ponzi schemes and thefts occur due to financial pressure felt by the securities industry participant, starting off small but ballooning over the course of a few years to involve many more victims.
With the imposition of a bona fide fiduciary standard, and substantial education and training around that standard, over the course of time a true fiduciary culture can develop among all providers of personalized investment advice – whether investment advisers or brokers. And with such a culture will come a reduced number of transgressions, and reduced need for examinations and other forms of oversight. In essence, the SEC, FINRA, and state securities administrators, whose collective staffs have grown to number thousands and thousands (not counting the many compliance officers and staff within firms themselves, nor compliance consulting firms), can see a reduced need for examinations under a bona fide fiduciary standard. Our government’s resources, always limited, can be focused on what truly matters in protecting consumers – asset verification and the detection of actual frauds before they grow into Madoff-like billion-dollar frauds.
Third, and perhaps most importantly, the fiduciary standard reduces the risks of rampant abuses by Wall Street. Think about it. What if Wall Street did not consist of six hundred thousand (or more) product peddlers, but instead consisted of hundreds and hundreds of thousands of fiduciary “purchaser’s representatives”? These fiduciary advisors, bound to use their expertise to guard against undue risks to their clients, would carefully scrutinize the many complex products of today. It is likely that the widespread use of mortgage-backed securities consisting of sub-prime mortgages (as Senator Levin expressed in 2010, “sh***y products) would have occurred had such deals been scrutinized by expert fiduciary advisors, instead of being pushed upon unsuspecting investors.
In fact, the securities markets would likely become far more “efficient” as to the pricing of securities. IPOs of common stock, which on average underperform the overall market in the first two years after issue (due to the hype provided by investment banking firms which underwrite the firms), would likely be much more fairly priced. Asset price bubbles would receive far more scrutiny, as they began to occur, as experts better evaluated the available evidence in adherence to their fiduciary duty of due care to protect their clients against undue risks.
Another type of efficiency would occur, over time. Hundreds of thousands of purchaser’s representatives – fiduciary, expert advisors – would place pressure on the Wall Street oligarchy that controls investment underwriting today. Fees and costs in the primary market for securities issuance would decline. Continued disintermediation in the secondary markets would also occur. Consider the excessive costs imposed upon investors by “payment for order flow” (exacerbated by dark pools and high-frequency trading firms) and “revenue-sharing” arrangements today; pressure would be put on brokers and dealers to eliminate, or at least substantially reduce such payments, should expert advisors accompany more of the consumers of securities products today. Of course, that may be exactly what Wall Street fears most, from the application of the fiduciary standard, and hence why Wall Street opposes a bona fide fiduciary standard so ferociously.
In summary, those who desire to see a reduced role for government, a lesser number of regulations, and reduced need for government to oversee Wall Street, should embrace the application of a bona fide fiduciary standard to all providers of personalized investment advice. Applying the fiduciary standard is the ultimate in securing a marketplace solution to Wall Street's continued abuses. Policy makers should recognize this - regardless of their political affiliation.
Nearly Four Decades of Line-Blurring: Salesperson vs. Fiduciary
Due to failings in our government, aided in large part by FINRA (a failed regulator, designed by its Wall Street member firms to protect the industry rather than protect consumers), the role of the trusted advisor versus the product salesperson has blurred. Those who deal at arms-length (in which caveat emptor is the standard of protection, augmented to some degree by certain required disclosures) have moved into "trust-based selling," in essence disguising themselves as trusted advisors. Despite early warnings from the SEC and FINRA (f/k/a NASD), as evidenced by statements made in 1941 and 1963, salespeople hold themselves out as trusted advisors, yet then deny fiduciary status.
How did we get to where we are today? At the beginning of the 20th century, “The business of buying and selling stocks and other securities [was] generally transacted by brokers for a commission agreed upon or regulated by the usages of a stock exchange,” wrote John Dos Passos in “A Treatise of the Law of Stock Brokers and Stock Exchanges, published in 1905. Indicative of the known distinctions between brokers and dealers, an early Indiana law provided for the licensing of brokers but not for “persons dealing in stocks, etc., on their own account.”
In those days, stockbrokers were known to possess duties akin to those of trustees, including the duty of utmost good faith and the avoidance of receipt of hidden forms of compensation. To illustrate that point, Dos Passos, in his treatise, quoted from Banta v. Chicago: “He is a broker because he has no interest in the transaction, except to the extent of his commissions; he is a pledgee, in that he holds the stock, etc., as security for the repayment of the money he advances in its purchase; so he is a trustee, for the law charges him with the utmost honesty and good faith in his transactions; and whatever benefit arises therefrom ensures to the cestui que trust.“
By the early 1930s, the fiduciary duties of brokers (as opposed to dealers) were widely known. As summarized by Cheryl Goss Weiss, in contrasting the duties of a broker vis-à-vis with a dealer: “By the early 20th century, the body of common law governing brokers as agents was well developed. The broker, acting as an agent, was held to a fiduciary standard and was prohibited from self-dealing, acting for conflicting interests, bucketing orders, trading against customer orders, obtaining secret profits and hypothecating customers’ securities in excessive amounts — all familiar concepts under modern securities law.”
The fact that stockbrokers were known to be fiduciaries at an early time in the history of the securities industry (when acting as brokers and not acting as dealers) should not come as a surprise. To a degree it is simply an extension of the laws of agency. One might then surmise that, if the broker provides personalized investment advice, then a logical extension of the principles of agency dictates that the fiduciary duties of the agent also extend to those advisory functions, as the scope of the agency has been thus expanded.
Early court cases confirmed the existence of broad fiduciary duties upon brokers in situations where brokers possessed relationships of trust and confidence with their clients. For example, in the 1934 case of Birch v. Arnold the relationship between a client and her stockbroker was found to be a fiduciary one, as it was a relationship based upon trust and confidence. As the court stated: “She [the client] had great confidence in his honesty, business ability, skill and experience in investments, and his general business capacity; that she trusted him; that he had influence with her in advising her as to investments; that she was ignorant of the commercial value of the securities he talked to her about; and that she had come to believe that he was very friendly with her and interested in helping her. He expected and invited her to have absolute confidence in him, and gave her to understand that she might safely apply to him for advice and counsel as to investments … She unquestionably had it in her power to give orders to the defendants, which the defendants would have had to obey. In fact, however, every investment and every sale she made was made by her in reliance on the statements and advice of Arnold, and she really exercised no independent judgment whatever. She relied wholly on him.”
In Norris v. Beyer, another pre-FINRA decision (1938), the broker’s customer, “untrained in business — she had been a domestic servant for years — was susceptible to the defendant’s influence, trusted him implicitly.” The court stated: “We are persuaded from the facts of the case that a trust relationship existed between the parties … The [broker] argues that he was not a trustee but a broker only. This argument finds little to support it in the testimony. He assumed the role of financial guide and the law imposed upon him the duty to deal fairly with the complainant even to the point of subordinating his own interest to hers ….”
The fact that broker-dealers may, when providing more than trade execution services to individual investors, possess broad fiduciary duties was confirmed by the SEC Staff Study on Investment Advisers and Broker-Dealers (As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act) (Jan. 2011), which stated: “Broker-dealers that do business with the public generally must become members of FINRA. Under the anti-fraud provisions of the federal securities laws and SRO rules, including SRO rules relating to just and equitable principles of trade and high standards of commercial honor, broker-dealers are required to deal fairly with their customers. While broker-dealers are generally not subject to a fiduciary duty under the federal securities laws, courts have found broker-dealers to have a fiduciary duty under certain circumstances … This duty may arise under state common law, which varies by state. Generally, broker-dealers that exercise discretion or control over customer assets, or have a relationship of trust and confidence with their customers, owe customers a fiduciary duty similar to that of investment advisers.” [Emphasis added.]
What about the Investment Advisers Act of 1940? At the time of its enactment it was designed to apply to investment counsel, a relatively new type of professional paid directly by the customers for his or her advice. It required investment counsel (i.e., investment advisors) to register with the SEC.
Moreover, Section 206 of the Advisers Act imposed a fiduciary duty upon investment advisers. Brokers were exempted from the registration requirements of the Advisers Act, provided that their investment advice remained “solely incidental” to the brokerage transactions and they received no “special compensation.”
But here’s the key — the Advisers Act never stated that brokers providing personalized investment advice (whether “solely incidental” or otherwise) were not fiduciaries. The state common law applicable to brokers – under which brokers were often found to be in a relationship of trust and confidence with their clients - remained the same.
By the mid-1930s, broker-dealer firms were subject to registration requirements, but the attributes of a profession were sorely lacking. Partly to escape from direct government regulation, but also as a result of the aspirational desires of the Maloney Act’s primary author — Sen. Francis T. Maloney (D-Conn.) — to create a true profession, the Maloney Act of 1938 amended the Securities Exchange Act of 1934 and created the authority for the recognition of a self-regulatory organization.
Public policymakers in 1938 clearly understood that the goal of the Maloney Act was to create a true profession, bound by fiduciary standards. In 1938, the assistant general counsel of the Securities and Exchange Commission stated that the “commission has concluded that the next stage in the job — the job of raising the standards of those on the edge to the level of the standards of the best — can best be handled … by placing the primarily responsibility on the organized associations of securities dealers throughout the country ….”
Early statements by NASD (now FINRA) confirmed the existence of high fiduciary standards of conduct for brokers in the very early days of the self-regulatory organization’s existence. In only the second newsletter it issued for its members, in 1940, NASD unequivocally pronounced that brokers were fiduciaries: “Essentially, a broker or agent is a fiduciary and he thus stands in a position of trust and confidence with respect to his customer or principal. He must at all times, therefore, think and act as a fiduciary. He owes his customer or principal complete obedience, complete loyalty, and the exercise of his unbiased interest. The law will not permit a broker or agent to put himself in a position where he can be influenced by any considerations other than those to the best interests of his customer or principal … A broker may not in any way, nor in any amount, make a secret profit … his commission, if any, for services rendered … under the Rules of the Association must be a fair commission under all the relevant circumstances.”
By 1942, the committee appointed by NASD to enact rules of conduct for its members had finished its work, and the SRO’s rules of conduct (via a “Uniform Practice Code” and “Rules of Fair Practice”) were adopted. Yet, despite the clear pronouncements by early NASD writers in the SRO’s 1940 newsletter, the aspirations of SEC commissioners and Sen. Maloney for adoption of the highest professional standards, and case law clearly setting forth that a broker was a fiduciary when in a relationship of trust and confidence with a customer, NASD’s rules of conduct omitted any reference to the fiduciary duties of brokers when providing personalized investment advice.
In 1942, and now, there exists little doubt that the relationship between most clients and their brokers, when personalized investment advice is provided, is a personal one.
Indeed, as recognized by the SEC staff as recently as 2005, “[f]ull-service broker-dealers have always sought to develop long-term relationships with their customers who often come to rely on them for expert investment advice,” according to a law review article by Ronald J. Colombo, “Trust and the Reform of Securities Regulation,” published in 2010.
In such relationships, he continues, a broker “does not simply execute orders at a client’s command, but rather renders investment advice to the client ….” Such brokers are not simply functionaries, but rather “are clearly fiduciaries in the broadest sense.” [Emphasis added.]
Yet FINRA’s omission of any mention of fiduciary standards in its rules for its brokerage firms and their registered representatives continues to this day. By, in effect, ignoring the common law and the intent of the Maloney Act’s principal author, FINRA continues to keep the standards for brokers at the very low level of suitability.
Deception Through the Use of Titles Denoting Relationships of Trust and Confidence
The view that one holding out as an advisor should be governed by the fiduciary standard of conduct also finds recent support in academic literature: “The relationship between a customer and the financial practitioner should govern the nature of their mutual ethical obligations. Where the fundamental nature of the relationship is one in which customer depends on the practitioner to craft solutions for the customer’s financial problems, the ethical standard should be a fiduciary one that the advice is in the best interest of the customer. To do otherwise — to give biased advice with the aura of advice in the customer’s best interest — is fraud. This standard should apply regardless of whether the advice givers call themselves advisors, advisers, brokers, consultants, managers or planners.“ [Emphasis added.] Angel, James J. and McCabe, Douglas M., Ethical Standards for Stockbrokers: Fiduciary or Suitability? (September 30, 2010), at p.23. Available at SSRN: http://ssrn.com/abstract=1686756.
There exists authority, as well, on the inappropriate use of titles, from the SEC itself. Very early on the SEC took a hard line on representations made by brokers. In its 1940 annual report, it noted: “If the transaction is in reality an arm’s-length transaction between the securities house and its customer, then the securities house is not subject to a fiduciary duty. However, the necessity for a transaction to be really at arm’s-length in order to escape fiduciary obligations has been well stated by the U.S. Court of Appeals for the District of Columbia [Circuit] in a recently decided case: '[T]he old line should be held fast which marks off the obligation of confidence and conscience from the temptation induced by self-interest. He who would deal at arm’s length must stand at arm’s length. And he must do so openly as an adversary, not disguised as confidant and protector. He cannot commingle his trusteeship with merchandizing on his own account…'” [Emphasis added.]
Additionally, in its 1963 comprehensive report on the securities industry, the SEC stated that it had “held that where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer …[B-D advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers in situations where such reliance is not merited, and obscuring the merchandising aspects of the retail securities business ... Where the relationship between the customer and broker is such that the former relies in whole or in part on the advice and recommendations of the latter, the salesman is, in effect, an investment adviser, and some of the aspects of a fiduciary relationship arise between the parties.”
The fact that misrepresentations of one’s status amounts to fraud is reflected in a recent regulatory action filed by the Illinois attorney general in an action seeking civil penalties against Mr. Richard Lee Van Dyke, Jr. (a.k.a. “Dick Van Dyke”), a seller of fixed indexed annuities. Mr. Van Dyke is alleged to have stated in advertising: “If you want a successful financial plan, you need a financial advisor you can really trust … He believes in principles like full disclosure and transparency and he doesn’t sell investments on commission which means he’s on your side so you get to reach your goals first before he does. When’s the last time an investment advisor put you first?”
The basis of the complaint is a violation of Illinois’ Consumer Fraud and Deceptive Business Practices Act. The attorney general’s complaint notes: “The representations cited above, on which defendants intend consumers will rely, as well as others on defendants’ website, lead consumers to believe defendant Dick Van Dyke is an objective, knowledgeable and unbiased financial services expert for consumers facing retirement, when in fact he is an insurance salesman.”
Unlike the State of Illinois, FINRA persists in letting brokers use titles in a deceptive manner. As a result of regulatory missteps by FINRA over many decades, substantial consumer confusion now abounds as to the standard of conduct consumers can expect from their providers of investment advice. In large part this is due to the improper use of titles by registered representatives, which, as discussed above, rises in the view of many to the level of intentional misrepresentation (i.e., fraud). Yet FINRA does nothing to prevent such fraud from occurring.
I saw a television advertisement from an insurance company last night. It reviewed the roles of coaches and mentors, and then depicted their insurance agents as "advisors." Yet, every insurance agent I know of who works for that company will fervently deny that they are in a fiduciary relationship with their clients.
Say what you do. Do what you say. These are core principles. Yet, they are violated every day by Wall Street’s “financial consultants” and “wealth managers” – at least the many who do not accept fiduciary status.
Desperate, Monied Attempts to Preserve an Archaic Business Model
There are many economic interests who desire to continue this morass of confusion (from the standpoint of the consumer). These interests do not desire to accept the higher standard of conduct of a fiduciary. They are fearful of a profession, for with it comes professional-level compensation, a move toward hundreds if not thousands of professional practices, and a move away from the distribution systems of today with their substantial extraction of rents. In essence, the broker-dealer business model of today, an anachronism, is challenged at its very core by these developments.
Hundreds of millions of dollars have flooded into Washington, DC, in recent years, and tens of millions of dollars more each year, as Wall Street firms and insurance companies attempt to wield their influence to prevent the evolution toward a fiduciary model.
At a minimum, Wall Street and the insurance companies seek to prevent common-sense measures which would permit consumers to clearly detect the type of relationship (arms-length, or fiduciary in which they find themselves. They desire to continue their practice of "trust-based selling" - an oxymoron. Wall Street's broker-dealers, investment banks, and the insurance companies desire to perpetuate the great deception of consumers today. To paraphrase Prof. Angel and others, "To hold oneself out as a trusted financial advisor, without accepting the duties which flow from fiduciary status, amounts to fraud."
Far more devious, however, is Wall Street's greater aim - its desire (via FINRA, aided by SIFMA and FSI and the many broker-dealer firms who are members of these organizations) to take over and kill the independent fiduciary investment advisory profession. While FINRA has recently indicated that its "SRO over RIAs" ambitions is not its key legislative priority today, there is no doubt that it continues to lay the groundwork for another run at Congress in the future.
Will We Enter the "Age of the Trusted Advisor"?
There is no doubt that, for individual Americans, the financial world has become far more complex over the past few decades. No longer do most Americans in retirement head to the mailbox for their monthly pension check. Instead, individual investors possess the solemn responsibility to save, invest, and manage portfolios for the purpose of achieving their lifetime financial goals. We are in a situation where the number of mutual funds outnumbers the number of publicly traded stock on the exchanges. Not to mention the ever-more-complex array of financial products, such as UITs, ETFs, REITs, hedge funds, commodities futures, private equity investments, ETNs, and so much more.
Because there exists such vast asymmetry in the information between financial product providers and individual investors, in many instances individual investors are able to be sold high-cost investments. Even today, investment products continue to be sold which possess enormously high rent extraction, driven in large part by huge advertising and promotional budgets of Wall Street’s firms. Consumers, most of whom don't understand the distinction between a share of common stock and a stock mutual fund, are simply outmatched.
Yet, now we appear ready to enter a new age. Call it the age of the trusted advisor. It is the age of fiduciary advisor, who represents only the individual investor, and not the product manufacturer. It is the age where an advisor says, "I will step into your shoes, with my knowledge and expertise. I will act for you, or advise you, as I would advise myself, in return for a reasonable fee."
In the past few years, it has also become increasingly acknowledged that many types of investments are commodities. (For a clear example - index funds.) At financial advisor industry conferences more and more discussion has occurred of the "commoditization" of investments, and forward-thinking financial services bloggers and journalists continue to write articles on this theme.
The result of these trends is disintermediation. But the dinosaur called Wall Street will not fall down without first thrashing out. It seeks to preserve the investment product sales model, despite its many conflicts of interest, its high costs of intermediation, and its unexplainable inefficient and high extraction of rents.
Direct sales to consumers continue to expand, such as from discount brokerage firms and low-cost mutual fund complexes. Much of this occurs because individual investors, often repeatedly burned when dealing with product salespersons only to have their trust betrayed, have eschewed all providers of financial and investment advice. They simply believe, in some instances, that "investment advice" is not worth paying for, and they guide their own portfolios (aided in many cases by an increasing amount of investment literature - some good, but much of which is awful).
While individual investors possess the power to effect disintermediation, they do not always possess the knowledge to effect that change. Hence, many more investors remain trapped, by their own ignorance, within the investment product manufacture and sales business model. Recent studies have revealed that nearly one-third of individual investors believe that their "financial consultant" does not charge them any fees at all, and that they are receiving advice that is being delivered gratuitously. If only they were so lucky.
Yet knowledgeable investors exist. Increasingly, and with the assistance (in large part of) independent journalists and others in the media, individual investors are looking for those few financial advisors who possess very few conflicts of interest. Many are directed to www.NAPFA.org for fee-only financial advisors, and to Garrett Planning Network (www.garrettplanningnetwork.com) whose members often provide hourly-based financial advice, and to the Alliance of Comprehensive Planners (www.acplanners.org).
In essence, individual investors recognize that, in this complex world, the guidance of a true professional is both needed and desired, and they are willing to pay reasonable compensation to experts for same. And, upon learning that trusted advisors do exist, these individual investors ascertain that they will actually save money, often substantially, by having an advisor who assists them to choose lower-cost products. How much is the net savings to investors, relative to the product-sales (broker-dealer) channel? A whopping 30% to 70%, in many cases. Enough for a comfortable vacation once a year for the client, in most cases.
This brings us to the rise of the fiduciary advisor, and specifically the recent expansion of the registered investment adviser (RIA) community. In recent years a trend has emerged in which individual investors seek out true fiduciary advisors, leading to this expansion. This form of remediation is positive, as the costs of remediation are far less than the costs saved from disintermediation (despite unsupported statements by Wall Street firms to the contrary).
Competition within the investment advisory space continues to drive down investment advisory fees, as well as open up services to nearly any investor. "Robo-advisors" (a poor name for these firms) and many other firms provide advice to investors, yet have no minimums which they impose. Many advisors now provide expert advice for hourly fees, or for fixed fees. Consumers usually receive far better and more comprehensive advice for fees which are substantially less.
Of course, there is resistance to these changes from the old business model of investment manufacture, promotion and sales. And deception also has increasingly taken place in an effort to preserve the high profits of the product-sales business model. For example, many financial advisors promote themselves to consumers as “fee-based advisors” while never mentioning that they also sell products for commissions. Instead of “V.P. Sales” on a business card, the term “financial consultant” has become commonplace for the product salesperson. Disappointingly, federal securities regulators have failed to address these deceptive sales practices (despite the many warnings against such deceptive sales practices in prior decades from these same regulators).
And SIFMA and FSI, Wall Street's main lobbying organizations, continue to state that "small investors cannot be served under a fiduciary standard." Hogwash! They are already successfully served under a fiduciary standard. What Wall Street really means by this statement is "we cannot extract large rents under a fiduciary standard to make it attractive to our product-sales-driven model to provide advice to small clients." In fact, most of Wall Street's larger brokerage firms have minimums which already rule out serving small clients, even when expensive products are sold!
The battle lines have been drawn. These battles exist, however, along several fronts - DOL/EBSA, SEC possible rule imposing fiduciary standards on brokers who provide personalized investment advice, the regulation and oversight of RIAs, state legislatures and state securities regulators and even in the courts (where state common law fiduciary standards are applied to relationships based upon trust and confidence).
As these battles continue, independent investment advisers and consumer groups must continue to explain the truth of the situation in which consumers find themselves today ... mass confusion, caused in significant part by deceptive marketing practices which regulators (SEC, FINRA) have refused to clamp down upon. Continued education of the SEC Commissioners, their staff, and members of Congress and their staffs is required, especially given the high degree of turnover in D.C.
Dodd-Frank: An Opportunity to Correct Three Decades of Inaction by the SEC;
DOL/EBSA "Definition of Fiduciary": Reflecting the Changes in Financial Services
The DOL's anticipated re-proposal of the "Definition of Fiduciary" rule, and the SEC's possible action to apply fiduciary standards (by SEC regulation) to brokers who provide personalized investment advice, are hotly contested battlegrounds. Much disinformation flies, especially from those desperate enough to preserve their archaic product-driven sales model. As a result, substantial education of policy makers is required.
While the education of policy makers is always a challenge, it is also an opportunity. It is the opportunity to correct the misleading sales practices which deceive too many Americans. It is the opportunity to more clearly and correctly draw the line between arms-length investment and insurance product sales and trusted investment advice. It is the opportunity to restore the trust of individual Americans in the providers of investment and financial advice. And it is the opportunity to formalize a profession of true, fiduciary financial and investment advisors.
To my colleagues already engaged in this effort, continue to persevere. To my colleagues who desire to get involved, do so - but with the understanding that these battles will not quickly be won.
Our fellow Americans should be able to tell a product salesperson from a trusted advisor. For those tens of millions of Americans who desire an advisor to act solely on their behalf, they deserve a profession of trusted financial and investment advisors. Indeed, America itself deserves all of the benefits - increased savings, greater investment in the capital markets, lowered cost of capital for firms, and greater economic growth - that the imposition of fiduciary duties will, over time, deliver.
This is an economic war. Between Wall Street (investment banks, broker-dealers) who seek to keep their gravy train, and Main Street (consumers).
Keep up the good fight. Thank you.
Professor Ron Rhoades is a lawyer, investment adviser, Certified Financial Planner™, and - commencing July 2015 – he will serve as Program Chair for the rapidly growing Financial Planning Program at Western Kentucky University. He may be reached via e-mail: email@example.com.
The foregoing is largely a compilation of excerpts from previous blog posts, yet even then does not fully set forth the legal and moral imperative behind the application of a bona fide fiduciary standard to the delivery of investment and financial advice. If you've read this far, I encourage you to view other blog posts, to gain even greater understanding of these issues.
The foregoing is largely a compilation of excerpts from previous blog posts, yet even then does not fully set forth the legal and moral imperative behind the application of a bona fide fiduciary standard to the delivery of investment and financial advice. If you've read this far, I encourage you to view other blog posts, to gain even greater understanding of these issues.
 Lowe v. SEC, 472 U.S. 181, 200, 201 (1985).
 Id. at 208.
 Id. at 210.
 In a recent study, Professors “Madrian, Choi and Laibson recruited two groups of students in the summer of 2005 -- MBA students about to begin their first semester at Wharton, and undergraduates (freshmen through seniors) at Harvard. All participants were asked to make hypothetical investments of $10,000, choosing from among four S&P 500 index funds. They could put all their money into one fund or divide it among two or more. ‘We chose the index funds because they are all tracking the same index, and there is no variation in the objective of the funds,’ Madrian says … ‘Participants received the prospectuses that fund companies provide real investors … the students ‘overwhelmingly fail to minimize index fund fees,’ the researchers write. ‘When we make fund fees salient and transparent, subjects' portfolios shift towards lower-fee index funds, but over 80% still do not invest everything in the lowest-fee fund’ … [Said Professor Madrian,] ‘What our study suggests is that people do not know how to use information well.... My guess is it has to do with the general level of financial literacy, but also because the prospectus is so long." Knowledge@Wharton, “Today's Research Question: Why Do Investors Choose High-fee Mutual Funds Despite the Lower Returns?” citing Choi, James J., Laibson, David I. and Madrian, Brigitte C., “Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds” (March 6, 2008). Yale ICF Working Paper No. 08-14. Available at SSRN: http://ssrn.com/abstract=1125023.
 John H. Walsh, “A Simple Code Of Ethics: A History of the Moral Purpose Inspiring Federal Regulation of the Securities Industry,” 29 Hofstra L.Rev. 1015, 1066-8 (2001), citing SEC, REPORT ON INVESTMENT COUNSEL, INVESTMENT MANAGEMENT, INVESTMENT SUPERVISORY, AND INVESTMENT ADVISORY SERVICES (1939).
 One might reasonably ask why “honest investment advisers” (to use the language of the U.S. Supreme Court in SEC vs. Capital Gains) had to be protected by the Advisers Act. Was it not enough to just protect consumers? The answer can be found in economic principles, as set forth in the classic thesis for which George Akerlof won a Nobel Prize:
There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this case there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in the average quality of goods and also in the size of the market.
George A. Akerloff, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), p.488. George Akerloff demonstrated “how in situations of asymmetric information (where the seller has information about product quality unavailable to the buyer), ‘dishonest dealings tend to drive honest dealings out of the market.’ Beyond the unfairness of the dishonesty that can occur, this process results in less overall dealing and less efficient market transactions.” Frank B. Cross and Robert A. Prentice, The Economic Value of Securities Regulation, 28 Cardoza L.Rev. 334, 366 (2006). As George Akerloff explained: “[T]he presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.” Akerloff at p. 495.
 Tamar Frankel, Trusting And Non-Trusting: Comparing Benefits, Cost And Risk, Working Paper 99-12, Boston University School of Law.
 “Applying the Advisers Act and its fiduciary protections is essential to preserve the participation of individual investors in our capital markets. NAPFA members have personally observed individual investors who have withdrawn from investing in stocks and mutual funds due to bad experiences with registered representatives and insurance agents in which the customer inadvertently placed his or her trust into the arms-length relationship.” Letter of National Association of Investment advisers (NAPFA) dated March 12, 2008 to David Blass, Assistant Director, Division of Investment Management, SEC re: Rand Study.
 “We find that trusting individuals are significantly more likely to buy stocks and risky assets and, conditional on investing in stock, they invest a larger share of their wealth in it. This effect is economically very important: trusting others increases the probability of buying stock by 50% of the average sample probability and raises the share invested in stock by 3.4 percentage points … lack of trust can explain why individuals do not participate in the stock market even in the absence of any other friction … [W]e also show that, in practice, differences in trust across individuals and countries help explain why some invest in stocks, while others do not. Our simulations also suggest that this problem can be sufficiently severe to explain the percentage of wealthy people who do not invest in the stock market in the United States and the wide variation in this percentage across countries.” Guiso, Luigi, Sapienza, Paola and Zingales, Luigi. “Trusting the Stock Market” (May 2007); ECGI - Finance Working Paper No. 170/2007; CFS Working Paper No. 2005/27; CRSP Working Paper No. 602. Available at SSRN: http://ssrn.com/abstract=811545.
 Macy, Jonathan R., “Regulation of Financial Planners” (April 2002), a White Paper prepared for the Financial Planning Association http://fpanet.org/docs/assets/ExecutiveSummaryregulationoffps.pdf provides an Executive Summary of the paper.