| 30 June 2010
On May 17, 1792, 26 brokers gathered under a buttonwood tree on Wall Street and agreed to the framework that eventually became the New York Stock Exchange. The Buttonwood Agreement was an innovation that accomplished two goals: it eliminated auctioneers who served as middlemen in a stock transaction, and it fixed the commission on transactions.
Other investment milestones include The Securities Act of 1933, which was the first serious attempt by the federal government to regulate the sale of investments instead of by each state. It prohibited fraud, deception and misrepresentation in the sale of securities to the public. The Investment Company Act of 1940 was enacted to regulate the mutual funds industry by eliminating conflicts of interest and requiring detailed financial disclosure by funds to the public.
Have you heard of the Wall Street Reform and Consumer Protection Act of 2009? It is in Congress now; if this bill is signed into law, it will represent a sweeping change in the evolution of investment advice. The bill seeks to replace suitability with fiduciary advice.
The 1933 Act requires brokers to make suitable recommendation to an investor, based on facts available at the point of sale. It prohibits brokers from making unrealistic claims about a particular investment. To meet suitability standards, salespeople are not required to offer the cheapest option--just one that meets the suitability test. Compared to suitability requirements, fiduciary language raises the bar.
Fiduciaries must act diligently in a client’s best interest in all aspects at all times. In contrast, the recommendation a salesperson makes regarding an investment product is not advice; instead, it is education. By adhering to fiduciary standards, investment advisers provide objective advice to clients.
After the Lehman collapse, AIG, GM and Madoff (even Bolze locally), this higher standard of accountability and responsibility is increasing in demand. LeConte has provided fiduciary advice (not suitability advice) since it opened. Kevin Painter co-founder of LeConte recently earned the Accredited Investment Fiduciary (AIF®) designation, so LeConte can extend fiduciary services to retirement plan sponsors. East Tennessee has only 19 people designated an AIF®, and Kevin is one of those 19.
Traditional brokers are struggling to understand the ramifications of these regulations. In a recent study by Chicago firm, Envestnet, 63 percent of Wall Street brokers polled said they thought all financial advisers are subject to the same obligation to act in their clients' best interests. The survey found that fewer than half of the brokers were very well prepared to act as fiduciaries under common financial scenarios.
Unfortunately, the survey also found that the investing public is equally confused. Seventy-three percent of investors polled say that they are either not very familiar or not familiar at all with the fiduciary debate. This result echoes LeConte’s findings in a study last year. LeConte discovered that East Tennessee investors are more comfortable doing nothing than asking for advice.
Fortunately, investors do not have to wait for Congress to act to realize the benefits of fiduciary advice.
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