Extending Fiduciary Standards Is No Panacea

The problem with Madoff had more to do with custody of client assets with his own firm acting as the clearing and recordkeeping entity, which he was able to falsify and make fraudulent reports. How about mandating independent custody of assets, so this type of fraud couldn't happen in the first place. It's fine and good to mandate fiduciary standards for all, but there needs to be a glass wall between custody and control of assets and reporting, etc. Another good reason to break up these large conglomerates that try to do everything financial, insurance, mortgage, bank related.

Anecdotes are not evidence. Let's review the errors and some of the many omissions in this article:(1) Madoff had a broker-dealer firm for decades, operating under the eye of NASD (now FINRA), the "self-regulatory organization" for broker-dealer firms. FINRA's own "internal report" stated that a few well-placed questions by its own investigators would have uncovered the fraud.(2) Only in the last two years of its operation was Madoff's Ponzi scheme registered with the SEC, as a registered investment adviser.(3) Fraud occurs in all types of financial services firms - broker dealers, registered investment advisers, insurance companies, banks, etc.(4) All of the leaders of the investment adviser community agree that more inspections and examinations of registered investment advisory firms are needed. That's the cure for combating fraud. Most investment advisers even support self-funding by registered investment advisory firms of the costs of such inspection and enforcement.(5) Applying fiduciary standards does not limit consumer choice of the products they will purchase. The argument that consumer choice will be limited is nothing but a red herring. The issue is the standard of conduct which should apply to those who provide the "professional guidance" the article refers to.In essence, the author of the article confuses one issue - the frequency and quality of inspections and examinations - with an entirely different issue - what standard of conduct should be provided when investors receive financial planning and investment advice.The article then provides nothing more than a rehashing of arguments made by broker-dealer firm lobbyists - arguments which have been refuted, over and over again, by reasoned analysis by law professors, state securities administrators, and seasoned consumer advocates.It is the broker-dealer community that has changed their business practices, moving from sales of commission-based products to enter into the world of investment and financial planning advice. The issue is whether registered representatives of broker-dealer firms, now undertaking the same activities as investment advisers, should also be subject to the same high fiduciary standard of conduct to which investment advisers are already subject. Of course they should.If a registered representative is going to hold out as a trusted advisor, using a title such as "financial advisor" or "financial consultant" or "wealth manager" - or if she or he is providing financial or investment advice (beyond just describing the product she or he are selling) - then that person should be held to the standard of conduct applicable to those in relationships of trust and confidence with their clients - a bona fide fiduciary standard. This fiduciary duty arises not just from the application of the Advisers Act, but also from state common law.Rather than conform to the law - a rich history of law found in nearly seven decades of application under the Advisers Act - which in turn is derived from centuries of state common law - the large broker-dealer firm lobbyists seek to erode consumer protection by changing the law to fit their business practices. In essence, they want to do what they want, free of the high standards typically found of those in relationships based on trust and confidence. These are the same large broker-dealer firms which brought you the current "Great Recession."President James Madison once wrote, "If men were angels, no government would be necessary." The "good guys" the article notes have no problems being held to the bona fide fiduciary standard of conduct when they enter into relationships based on trust and confidence. "Good guys" have nothing to fear in being subject to the Advisors Act's requirements.Rather than a well-researched piece, we receive nothing more than the musings of someone who clearly does not understand the importance of fiduciary duties in serving the advisory needs of Americans.Please advise the author to do his homework, and right a more reasoned and objective piece next time. Please have the author refer to sources such as Professor Laby's and Frankel's many academic writings summarizing and commenting upon fiduciary law (generally and as applied to various aspects of the securities industry), and this writer's web sites, www.fpcompliance.com and www.fiduciarynow.com.There are serious issues to consider, if fiduciary duties are to be applied to the activities of registered representatives. But this article does not discuss any of these real issues. Let's begin to raise the standards in this "debate."Ron A. Rhoades, JD, CFP(r)