SOURCE: Advizent, LLC

Advizent, LLC

December 05, 2012 10:06 ET

Independent Financial Advisors Should Voluntarily Raise the Bar on Standards: It's Right for Consumers and Good for Business

40-Act Principles Have Served as the Gold Standard for Fiduciaries, but Advisors Can and Should Do More to Distinguish Themselves, Say Advizent Founders, Charles Goldman and Steven Lockshin

NEW YORK, NY--(Marketwire - Dec 5, 2012) -  Advisors operating under the Investment Adviser Act of 1940 are subject to the highest level of duty, loyalty and care for their clients -- by law they are required to put the client's interests ahead of their own. Many decades of practice and precedent have established this principles-based approach as the gold standard for fiduciary care. But can advisors do more in the spirit of these principles to protect the interests of clients? Should they aspire to even higher standards?

"We believe that as the profession evolves, there is an opportunity for advisors and advisory firms to distinguish themselves by voluntarily going beyond the current 40-Act standards," says Advizent co-founder Charles Goldman.

Goldman and co-founder Steven Lockshin argue that advisors should voluntarily adopt more rigorous standards in areas like eliminating potential compensation conflicts, limiting practices that require disclosure, simplifying and clarifying disclosures where they are necessary, adding client safeguards in areas like custody, and making an explicit commitment to objective standards of practice. 

"By continually improving how we treat clients, we can deliver better client outcomes -- and that's the right thing to do, plain and simple," says Lockshin. "But it's also the right thing to do for our business. It truly differentiates us from other providers of financial advice."

Instead of adding disclosures and rules, advisors should eliminate conflicts

While 40-Act regulatory standards are the gold standard for independent advisors, Lockshin and Goldman see a gap in those standards -- in that the main remedy for potential conflicts is broad disclosure. They argue that a better solution -- and a key improvement to fiduciary standards -- would be to eliminate potential conflicts to begin with.

They point to potential conflicts like taking revenue share from asset managers, or different commission levels for similar products, or any payment from a product manufacturer to "sell" their specific product.

"Even though some advisors are disclosing potential conflicts and are committed to putting the client first, it doesn't change the fact that there may be embedded conflicts in the business model and compensation structure," says Goldman. "It's very hard for the consumer to know whether or not you are, in fact, conflicted. So why not just get rid of as many conflicts as possible right from the start?"

Stick with proven principles -- Byzantine rules will harm clients and the profession

The principles-based approach to regulation, as defined by the Investment Adviser Act of 1940, is simple, easy to understand, and easy to apply, according to Lockshin and Goldman. It has proven itself to be an optimal framework for those who want to raise professional standards.

"The essence of the consumer proposition is very straightforward -- you put the client first, always," says Lockshin. "It is based on accepted common law and decades of successful implementation. If anything, advisors should be looking toward broader and more rigorous application of this basic principle, rather than narrowing it and replacing it with a Byzantine system of rules."

The Advizent co-founders are concerned that supplanting simple 40-Act principles will water down the core mandate for fiduciaries -- harming both investors and the advisory profession. They believe a rules-based system will weaken professional standards by enshrining conflicts that are already problematic, and creating even more confusion for investors.

"When you move from broad consumer-based principles to a narrow set of rules, you increase the opportunity for abuse," says Goldman. "You'd have to create a new law with hundreds or even thousands of new rules. It would end up looking like the tax code -- with innumerable carve outs, exemptions, and loopholes. It would hurt investors and could deeply compromise the advisory profession."

There is nothing preventing advisors from re-defining their own standards upward

Goldman and Lockshin see an opportunity for advisors to voluntarily raise and re-define their own standards -- regardless of where current regulatory and legislative discussions end up.

"This is almost more of a market issue than a legal issue," says Lockshin. "The more legal rules you create, the less the profession is guided by principle, and the more people will find ways around the rules. By recommitting to broad principles, and voluntarily holding ourselves accountable to stricter standards, we can represent to consumers exactly what we're doing -- that our practices are fully transparent."

They believe that this market-based approach can help independent advisors distinguish themselves in an industry where the term 'fiduciary' is increasingly being re-defined downward and usurped by those who do not meet current standards. Advizent advocates moving toward more vigorous implementation of the 40-Act principles -- limiting practices that require disclosure, eliminating conflicts in compensation, and applying more stringent client safeguards.

"We already know that investors care most about duty, safeguards and professionalism," says Goldman. "There is nothing stopping advisors from stepping up their fiduciary game to deliver ever-higher performance in these areas. It's in the consumer's interest. And being doggedly principled about doing what's in the consumer's interest is also in the best interest of the business."

Goldman and Lockshin believe strongly that advisors ought to take up these consumer-driven 40-Act principles and push them as far as they can -- taking responsibility for moving the profession ever-closer to a business model that is fundamentally un-conflicted.

For more information or to schedule an interview, please contact Frank Lentini of Sommerfield Communications, Inc. at (617) 939-9094 or

About Advizent, LLC

Advizent is a membership organization of independent financial advisory firms whose mission is to empower consumers through education and referral resources, and by providing access to true independent advice. It does so by establishing objective Standards of Excellence created by Advizent and its independent board of consumer advocates and by identifying independent financial advisory firms willing to rigorously and consistently meet and be held to those Standards. Launched in 2012 by two financial services industry veterans, Advizent serves investors by helping them understand the benefits of working with an independent advisor and by providing access to top tier advisors committed to acting in their clients' best interest.

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