Home Wealth  Money Investors Misled By Brokers Masquerading As Fiduciaries

Investors Misled By Brokers Masquerading As Fiduciaries

Posted: Aug. 10th, 2010  |  By Forbes

powered by Forbes

RSS Syndicated News Email a Friend Suggest an Article Share Visit Website

When Mary Schapiro, Chairman of the Securities and Exchange Commission, spoke at the CFA Institute 2010 Annual Conference in May, the topic of her comments was the SEC's "Investor-Focused Agenda." Schapiro argued that the SEC is committed to giving investors the information they need and to helping bring sunshine to opaque markets.

She seems to have failed to notice a troubling development in investor protection that was right under her nose. Recently her host, CFA Institute (which provides investment-related articles to Forbes.com), began a national radio ad campaign touting the years of rigorous training its members undergo and boasting that its members are held to the highest fiduciary standards.

That's not always the case, as it turns out. Some CFA charterholders, such as brokers employed by the major Wall Street firms, do not acknowledge a fiduciary duty, which requires them to make their clients' best interests their top priority. Perhaps it's not polite to criticize your host (especially at its Annual Conference), but to me this smacks of yet another example of an agency that's too friendly with the folks it's supposed to regulate.

According to its website, "CFA Institute is a global, not-for-profit organization comprised of the world's largest association of investment professionals that is dedicated to developing and promoting the highest educational, ethical, and professional standards in the investment industry."

Among its 97,000 members in more than 130 countries, more than 87% are CFA charterholders, the site adds. As of August 2009 the top 10 employers of CFA Institute members were Bank of America (nyse: BAC - news - people ); Merrill Lynch; Barclays (nyse: BCS - news - people ); Citigroup (nyse: C - news - people )Credit Suisse (nyse: CS - news - people ); Deutsche Bank (nyse: DB - news - people ); JP Morgan Chase (nyse: JPM - news - people ); Morgan Stanley (nyse: MS - news - people ) Smith Barney; RBC; UBS (nyse: UBS - news - people ) and Wells Fargo (nyse: WFC - news - people ). These firms represent some of the largest broker-dealers in the world, employing hundreds of thousands of brokers.

At these and other firms, brokers may refer to their CFA designation in marketing materials directed at the general public, as well as in their publicly available Financial Industry Regulatory Authority BrokerCheck records. Doing so runs the risk of lulling investors into a false sense of security, however.

While CFA Institute expects charterholders to subscribe to a fiduciary standard, many in the brokerage industry are in positions in which they and their employers specifically do not accept this high standard of care. Instead, brokers often subscribe to a more lax "suitability" standard--meaning they are free to promote products that benefit the broker, and brokerage, more than the client, as long as those products are not blatantly unsuitable.

I recently brought this matter to the attention of Robert Dannhauser, the CFA Institute's director of Advocacy Outreach. Here's what he told me:

"You've hit upon a dilemma for some of our members, who are bound by our Code of Ethics and Standards of Practice as charterholders and/or members of CFA Institute, but who are employed by firms with business models that apply suitability standards rather than fiduciary standards in their dealings with clients. Our understanding is that in many such instances, the firms do not allow CFA charterholders to display the CFA designation after their name on business cards or other publicly available material, so that clients do not perceive any different standard than what the firm has adopted for all of its employees. This hopefully offers clients a clearer view of what they're getting. The key is for practitioners to not represent themselves as one thing but offer a different level of service than might otherwise be expected given that representation."

I was further assured that some brokerages employing CFA charterholders forbid them from referencing their CFA status in public materials. However, in my experience, many brokers do use their CFA status in marketing themselves to investors--especially to institutional and high-net-worth investors who are most likely to be familiar with the designation.

The reason is obivious. The CFA designation implies that the representative is not a mere retail huckster but a highly skilled specialist. Unfortunately, it's only after the retail broker dressed up like a fiduciary screws up that the investor might discover that he and his employer do not accept a fiduciary standard of duty.

Investors today are more aware than ever that the brokerage industry has for decades profited at their expense by operating under the worthless "suitability" standard. Early drafts of the financial legislation that was recently approved by Congress sought to replace the suitability standard with a fiduciary one. Once the lobbyists got hold of it, however, the language was watered down to the point where the matter will now merely be reviewed by the SEC.

Money managers and brokers are struggling to reinvent themselves and assure investors it's safe to "trust us one more time." As they do, only the clueless will continue to employ financial advisors who resist accepting fiduciary duty for their life's savings. In the meantime, state and federal regulators should cast a jaundiced eye toward the notion that investors are well served by CFAs whose charters imply a fiduciary standard of care but whose employers shun the very same standards.

Edward Siedle is a former SEC attorney and the president of Benchmark Financial Services.




Share on Facebook Share
See Next Article
Write a Story/Review about this topic

Post a Comment

 
Need to Get Away?
Top 10 Business Hotels
Who says you canít mix business with pleasure?
Read More
More Articles from Forbes.com

advertisement
Quick Links
Autos
Boating
Real Estate
Luxury Travel
Fashion
Search Real Estate
Find Your Dream Home
Search for homes by
State, Country or Style.
Event Calendar
advertisement
Current News & Features
Summon a Private Jet Right From Your Phone: JetSmarter is the Latest Uber of the Sky
Snatch Up This Award-Winning $12.7M Kailua Kona Pod-Like Home Before Someone Else Does
Grilling Tips From Essential New York Times Grilling Cookbook Author to Get You Through Labor Day Weekend
Breaking Bad & Sherlock Sweep the Emmys, Plus More Surprising Moments!
Grill Up This Double Cut Pork Chop With Malbec Marmalade Recipe
Food Network Star Justin Warner Breaks Down His 6 Favorite Burgers for Labor Day
Lake Tahoe's Wild Wild West-Inspired Buffalo Creek Ranch Is Full of Waterfalls, Ponds & Old Saloons
$19K Electric-Powered Radinn Wakeboard Will Be Your Next Summer Must-Have Water Toy
Tonino Lamborghini Releases $4,000 Scratch Proof Limited Edition Antares Smartphone
From Aaron Paul to Pregnant Zoe Saldana: Here's What You Missed at Audi's Star-Studded Pre-Emmy Party
See the complete list
 
Featured Photo Gallery
See the complete list
THINGS WE LIKE