Trone believes the financial-services industry has been slow to confront the issue of uniform rules, partly because a lengthy bull market has papered over the inadequacies of trustees, advisors and money managers. "This will become critical when the market begins to slide sideways or declines, and the investment committee goes looking for an independent third party who can verify that the negative performance results are a result of the market and not oversights or shortcomings of the investment committee," he says.
That is likely to happen sooner rather than later, Trone suspects. "I think we're going to be seeing market returns begin the painful migration to their historical norms," he says. Securities that are particularly overvalued, such as technology stocks, could contribute outright losses. "When client expectations are not beginning to get met or fulfilled, that's when the subject of investment fiduciary responsibility is going to become more important," Trone explains.
Also contributing to the urgency of establishing standards, he says, is the movement of professionals from outside to inside the investment arena. "CPAs are now looking to expand their traditional tax and audit services by offering investment advice," he says, "and there's a lot of confusion within the CPA community on the appropriate way to deliver investment services to clients. An alarming number of CPAs are signing up with brokerage firms to provide these investment services, and we could see somebody like the AICPA, on behalf of its membership, adopting these standards to send a clear signal to their members as to what's going to be expected of them if they are going to hold themselves out as a person who's offering investment advice."
Another catalyst Trone expects to contribute to demand for the center's rules would be the federal Department of Labor augmenting its 5500 audit with an audit of fiduciary responsibility. But the need for such rules is already at hand, he says. "Even in the current environment, while we're still getting rather robust returns, you have turnover on investment committees," he notes. "You have a new head of the committee who says, 'I'm assuming responsibility for this critical role, and I'd like a third party to evaluate what's been done in the past and give me a heads-up as to what's working and what's not.' "
Practice standards for financial advisors are the flip side of this audit coin, Trone continues. "If the audit says the investment committee should do something, intuitively that now becomes a practice standard for the investment advisor," he says. Currently, standards vary according to which regulatory body, the National Association of Securities Dealers or the Securities and Exchange Commission, oversees the advisors in question.
"In either case, neither body has given specific guidance on the minimum practice standards that are expected of investment advisors," Trone says. "This is a critical shortcoming in our industry. Investment advice is the only business that permits its practitioners to choose which regulatory body oversees their activities. In many respects, beauticians are more highly regulated than investment advisors."
Practice standards enunciated by professional organizations such as the Financial Planning Association and the National Association of Personal Financial Advisors "are too general," Trone says. "They say things like, 'You must work in the best interest of the client,' and 'Engage the client in discussion before executing investment strategies.' But none of these organizations has said, 'If you're going to do an asset-allocation study, here are the minimum practice standards to be followed.' " He also concedes that the promulgation of fiduciary practice standards could intensify the simmering strife between the advisory and broker-dealer communities.
Developing and promulgating these standards is the center's first mission; the second is to provide educational courses based on them. Currently, there are four such programs:
- A three-day course for advisors, including training in the standards and their application, including investment-policy statements, asset-allocation studies, standards of due diligence on funds and money managers and performance reports. Eligible for 18 hours of continuing-education credits from the CFP board and other organizations, the course costs $1,450.
- A two-day course for trustees, similar to the advisors' course, but with less detail. It also costs $1,450 and is also eligible for continuing-education credits. "A lot of trustees are themselves CPAs and attorneys," Trone notes.
- A three-day course that certifies chartered financial analysts and chartered investment-management consultants to perform fiduciary audits. The cost is $2,900.
- A five-day course, costing $4,200, for all other professionals who desire certification.
Still, the fact that no regulatory body or professional regulatory group such as the AICPA or the American Bar Association has taken the development of such standards upon itself speaks volumes about their own foggy conceptions of fiduciary responsibility. "In defense of the SEC, it's their job to regulate and enforce, not promulgate and educate," Trone says. "We don't want to further 'committicize' the process, and we don't want standards watered down by politics and the self-serving interests of different associations. Banks and brokerage firms are not anxious to put a report card out there."
Several financial advisors think Gibson and Trone are filling a gaping void. "Roger and Don are well-qualified to develop and lead the debate, and they are clearly capable of creating and proposing standards," says Glenn Kautt, president of The Monitor Group in Fairfax, Va. "It can only assist people who are fiduciaries in fulfilling their responsibilities."