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Mentor RIA Consulting

Allowing you to focus on what you do best

My Blog


Form CRS: Prop or Flop?

Posted on August 22, 2020 at 4:15 PM Comments comments (47)
After all the hype and noise about Form CRS, which was first required to be issued this summer, it appears that the intended audience – investment clients – are generally uninterested in the new disclosures and not engaged in the process of asking questions of their advisers. Research shows that almost no-one who received the new form, among the tens of thousands of clients who did, raised any issue or question with their advisor regarding Form CRS and its use.
Not surprisingly, this logically fits in with the response of clients to required disclosures generally: adding a few new pages with a somewhat different approach to the pile does not engender interest in persons already overwhelmed with information and fine print (much of it irrelevant and/or confusing). It probably provided employment to the rule drafters at the SEC and to a variety of attorneys and compliance persons who were well paid to help firms generate the documents newly required. The actual benefit to those most directly impacted – clients and their advisors – not so much.

Whether you are an advisor or investor, it would be interesting (and helpful) if you would share your thoughts and experiences on this latest venture of the regulators to ostensibly help investors. As an investor, have you asked your advisor(s) any questions based on what Form CRS addresses and suggests you ask? If you are an advisor, have your clients acknowledged and made use of the disclosures in any meaningful way? 

Is Best Interest Really Best?

Posted on June 27, 2019 at 11:51 AM Comments comments (0)
Much of the discussion surrounding the best interest rule has referenced the requirement that investment advisers are fiduciaries to their clients while brokers are not held to that fiduciary standard. Regulation Best Interest and the new customer relationship summary are intended to provide investors with a clear description of the duties and obligations of investment advisers, broker-dealers and dually registered persons and firms. Not surprisingly, this new approach is not meeting with universal approval and acclaim. In fact, Congress may take steps to change or remove the SEC’s new rule and this discussion will be moot.
However, returning to the SEC rule, the SEC interestingly has stated that investment advisers are no longer required to describe their duty to clients as fiduciary and must instead disclose that their duty is to serve the best interests of their clients! This obviously is not identical with what most registered investment advisers do – act as fiduciaries – and how they currently describe and market their services to clients. 
So what apparently happens is that the SEC effort to clarify the differences between different roles ends up potentially providing clients with less assurance respecting their investment adviser and no less confusion about how the roles of broker-dealer and investment adviser differ. In addition it instead appears to create confusion and require a great deal of time and energy for investment advisers to once again change all their documentation to meet this new requirement. Not sure how this serves anyone on the investment adviser side of the industry, whether adviser or client.
Not surprisingly, insurance sellers have no fiduciary or best interest obligation.  Maybe that should be a consideration when we are thinking about how to best serve and protect investors.

State Specific Fiduciary Rules: How Far May They Go?

Posted on February 14, 2019 at 12:48 PM Comments comments (0)
With the failure of the DOL Fiduciary Rule and the sluggish pace of the SEC Best Interest proposal, many states are looking at taking their own steps towards strengthening the rules for investment professionals so as to provide more protection for consumers of investment advice and related activity. This state action is receiving mixed reviews for a variety of reasons.
Apart from the polar opposites of the rules are not strong enough and the rules are too limiting for investment professionals, there are other important concerns. One of the criticisms which seems appropriate is the likelihood if not certainty that investment professionals working in more than one state will be subjected to different standards and outcomes. This would not only impose additional costs in time and effort in keeping up with the varying requirements, but additional review to ensure that the right standard is being applied in each case. It would also have the rather interesting and possibly unfortunate outcome that consumers would be treated differently depending on their state of residence.
Another important consideration may be the potential for conflict between federal and state law in some cases. For example, the National Securities Markets Improvement Act applies federal pre-emption to state rules affecting SEC registered investment advisers. This means that a state applying a different standard from that the SEC applies with regard to investment advisers may find its legislation unenforceable. Currently, the state of Maryland is in the process of changing rules for a variety of financial professionals, including investment advisers. Though the changes likely will affect state-registered investment advisers it seems that those changes will not apply to SEC-registered advisers. This creates another mismatch and is not a strong selling point for state initiated changes.

The Importance of Formal Work Place Processes

Posted on September 28, 2018 at 5:17 PM Comments comments (0)
An established work flow and process is critical to the smooth functioning of almost any business and the financial advice business is no exception. All too often, a business gets started and the founders do not take the time to fully work through how the recurring tasks should be planned out to ensure both consistency and thoroughness. When it becomes apparent that one needs to get a solid process in place, it is often too late to get it done easily and without interfering with the necessary day to day tasks.
Some advisers say that this is OK as each of them in the business has their own approach and clients and everyone is happy. But what about the times a client has a need and the specific adviser is unavailable – on vacation, at a conference, ill, etc. – and the available adviser does not know where all the necessary information is located to effectively service that client? If an adviser does not have comprehensive notes regarding the client, the plan, the investments and how all tie together?
When you have a usual process in place, this information is readily available to all (who are allowed and need access) and in a format understandable to all. This makes servicing clients easier, allows for others to step in as needed and also allows for compliance and firm-wide metrics allowing better understanding of the business and how it is working.
The good news is that there are firms and consultants available who can help you develop, memorialize, test and implement firm-wide processes to address the potential problems and their associated risks. It also helps to satisfy some real compliance needs and improves the firm’s results on audit. Without a process – written (whether digital or paper) – a firm’s ability to successfully grow and maintain a high level of service is severely compromised. Do you have that process in place?

Major Hurricane: Business as Usual?

Posted on September 14, 2018 at 4:31 PM Comments comments (0)
Whether it is wildfires on the West Coast, ice and snow in the Middle West, or tropical storms in the Southeast, one common thread is the questionable nature of business continuity in the face of nature’s force. Regulators, seeing the potential disruption of the financial industry and harm to its clients in such cases, have made it a priority to require advisory firms to put in place comprehensive plans for disaster recovery and business continuity.
Leaving aside for the moment the question of how many clients, caught in the throes of a natural disaster, would be focused on the details of an aspect of their financial plans or desirous of making a specific trade, the pertinent question may be how would one ensure that any such client requests could be handled promptly and effectively whatever the weather.
The good news is that advances in technology and particularly the availability of data, applications and access through the cloud have made it far easier and more effective for advisers to provide service in the face of natural and other disasters. The need for access to a physical office or a particular computer is no longer essential as simply having access to the internet may allow the adviser to place trades, modify plans, send reports and otherwise communicate with and for the clients.
Now when a storm threatens, an adviser can notify clients of the best way to communicate as well as to shift location to ensure that business will continue despite the reach and effects of the disruption.  With their finances in good hands, clients will have at least one burden lifted from them as they, in turn, prepare for the storm and handle their own issues and preparations. What better way for an adviser to reassure clients and reinforce the adviser’s value to them.

Best Interest and Bureaucracy

Posted on August 10, 2018 at 10:54 AM Comments comments (0)
Amidst the plethora of bureaucratic rule making, it is common to hear the regulated complaining about the burdensome nature of the seemingly endless rules. The amount of time and energy – and so expense – which goes into compliance seems to increase almost daily. The public, the pundits and of course the regulators themselves all seem to shrug off those complaints as if they were merely sour grapes and without any real meaning. Meanwhile, those in the industry continue to seek clarity and simplicity.
The recent release of the SEC’s proposed best interest rule seems to put the lie to any claim of sour grapes and provides support for claims of over-regulation and excessive bureaucratic burdens. The rule itself – almost four pages in length – pales next to the accompanying “preamble” of some 400 pages more. That is crazy.
As you might well imagine, there is little of value in those four hundred pages but they need to be examined to ensure that no surprises slip in. This document is tailor made for lawyers who will look for any lever in those four hundred pages to allow them a basis for suing the industry deep pockets and make some money for themselves while saying it is for the investors. It sure is not about the investors – the consumers that are supposedly to be protected. They (wisely?) won’t take the time to dig through all that drivel the bureaucrats have written.
[In one person’s view] there should simply be a short and clear rule that says the purveyors of investment advice must act in the best interest of their clients. The rule should also say that disclosure of actual or likely conflicts does not cure any practice that is not going to result in the best interest of clients being served. Just because you tell someone that your business incentivizes behavior that is in the perceived best interest of the business and its employees (and not necessarily in the best interest of its clients) cannot excuse or protect the behavior. That type of safe harbor only leads to abuse.

Advisers and Social Media

Posted on July 29, 2018 at 10:01 AM Comments comments (0)
For some time now, advisers have been exhorted to make use and more use of social media. If they don’t, they are told, they will fail and lose clients and potential clients. In response, we have seen an increasing use of social media by advisers, including the recent “authorization” to use Twitter media. All to the good, perhaps, but it may be wise for advisers to exercise a bit of restraint and caution.
First, think about the headlines of late and the increasing number of persons whose statements on Twitter have gotten them fired from a job, deprived of opportunities and castigated by the responses of others on Twitter and other social media. You will want to be careful what you say and Twitter is not set up to force you to take your time and think about what you are saying (or potentially to whom). In most cases, you will want to keep your business comments for your business Twitter account and personal comments – including all of your very smart opinions – for your personal account only.
Related to this is the second point which is to remember that what you put out there is in some fashion permanent. Not only are you required to maintain a complete record of all Twitter (and other social media) activity for your business account, but the regulators will want to be able to examine it at any point in time. So once that easily typed message goes out into the everywhere, you can’t pull it back.
Which brings us to the third point – certain types of statements are forbidden or very limited by regulation of advisers. For example, as an investment adviser, you need to avoid saying anything that resembles a recommendation for someone to purchase a particular security. On the flip side (for example), some regulators consider a Facebook like to be the equivalent of an endorsement of the adviser and so, again, forbidden.
More food for thought might be the understanding that what you put out on social media can reach all kinds of folks, including some you would never have expected or intended to communicate with at all. It may flatter the ego to know that some number of folks are “following” what you say but you might want to remember to be careful about what you do say and make sure statements are clear and not capable of more than one interpretation. Down that road lies more potential for misunderstanding and trouble.
Bottom line: social media can be a good tool for advisers but only if used sensibly.

Fees, Bond Markups and Other Advisor Charges

Posted on May 17, 2018 at 12:15 PM Comments comments (0)
Advisor charges for the various services they provide investors have always been important to investors, regulators and the advisors themselves. The recent headlines about best interests, fiduciary duty, lawsuits over 401(k) fees, required disclosures to investors and more have had their central focus on how advisors make their money. The most recent development in this area is the new rule requiring brokerage firms to start disclosing some of the fees they charge their clients to purchase or sell municipal bonds. Note particularly the term “some” here – it means that investors won’t get full disclosure and will continue to be taken advantage of by their brokers.
What fees are we discussing? In this case it is the markup (or down) on the price charged (or paid to) clients transacting in municipal bonds. According to one source (Investment Advisor), these charges amounted to about 1.1 percent on investment grade bonds during 2016. Note that these charges were not subject to disclosure to the investors who are often unaware they occur. Investors would likely pay less if, instead, the investor purchased mutual funds holding the same municipal bonds.
How does the markup work in practice? In one case, an advisor for a major firm told his client that although he charged an asset management fee for some of the client’s assets, he would not charge a fee on the large portfolio of individual municipal bonds he had acquired for the client’s account. The client thought this was a bargain. However, the advisor conveniently forgot to inform the client that he was paid tens of thousands of dollars on markups on those bonds he selected. Wouldn’t you think that such an approach should have been disclosed? Clearly this approach would not be consistent with the fiduciary duty standard investment advisers are held to meet and would not be appropriate under the SEC’s new proposed best interest rule. Knowing that this type of activity occurs makes clear that the new rule on bond markup disclosures is not before time and that hopefully it will be strengthened as we move forward. 

New SEC "Best Interest" Rule

Posted on May 3, 2018 at 11:05 AM Comments comments (0)
The Securities and Exchange Commission has proposed what it terms a Best Interest Regulation which is to govern how broker/dealers interact with their customers. A distant parallel to the current discussion about the Department of Labor’s Fiduciary Rule, this proposed regulation does not change the dichotomy in treatment of registered investment advisers versus brokers who are subject to the SEC.  In other words, different rules will still apply to these two different groups.
Perhaps the biggest change is the institution of a “best interest” standard for brokers when interacting with retail customers/investors. This is a step up from the former suitability standard which, in many cases, amounted to no more than lip service to the customer’s interests and preserved the ability of brokers to place their interests on a par with (if not above) those of their customers. The proposal includes requirements for further disclosure of a broker’s financial interest and incentives in transactions as well as the establishment of procedures to ensure compliance.
Another aspect of the proposal is the restriction/limitation of the use of the title advisor or adviser by a broker. This change will address a source of real confusion among investors and help make clearer how the services and responsibilities of brokers and investment advisers differ.  
Naturally, there are many different opinions on this SEC proposal but, at the very least, this proposal is a step in the direction of increased consideration for and protection of retail investors. Although not a panacea, and well short of an across the board fiduciary standard (which I fully support), the proposal is a positive move. It will be interesting to follow the comment period activities and see where this proposed regulation finally lands. 

Helping to Prevent Senior Financial Abuse

Posted on January 5, 2018 at 9:42 AM Comments comments (0)
One of the high priorities for the SEC announced in 2017 was the growing recognition of problems with the financial abuse of senior citizens. Given the close relationship with client money held by brokers and investment advisers, it makes sense to get those persons involved with their older clients from the standpoint of the potential for abuse by others.
An elderly person may not always be aware or understand when they are being taken advantage of by another person, whether because of reduced capacity, misplaced trust, or even manipulation. The sources of the abuse often are family members or caregivers but also may be trusted persons such as a pastor, attorney, contractor, financial adviser, broker, accountant or even scam artists.
Among the warning signs to look for are the following:
Changes in banking habits and the identity of persons handling financial matters for the client
Large or extraordinary withdrawals outside of normal client needs
Access to the elderly client is restricted or denied by another person
A caregiver speaks for the client or is always present at any meetings so the client may not be able to speak freely
If there is any reason to suspect financial abuse, the issue should be noted and reported for possible action. A variety of organizations and services may be available to help if you suspect that someone is being subjected to financial (or other) abuse. Apart from law enforcement and adult protective services, the various regulatory authorities and other family members may be informed of the suspected problems. Ignoring the problems will not help the client, the family, or the adviser. You may be the only person who steps forward to make a difference so much depends on you.