Letter to Editor--05/13/2010--Financial Reform

Submitted May 13, 2010 to Wilmington News Journal

The Senate is debating a bill designed to fix many of the problems on Wall Street; it’s called the Restoring American Financial Stability Act of 2010 (RAFSA). We have all been affected, to some degree, by the Great Recession of 2008-2009, and thus we are all impacted by the proposed solution. There were many, many causes, and therefore there are many areas that need to be addressed in RAFSA.

The issue of conflicts of interest for financial professionals, and specifically the concept of fiduciary, has reached the headlines. This is due in no small part to the testimony of Goldman Sachs employees that they had no obligation to tell their customers what they knew about the doomed products they were selling. (This type of disregard for customers led to $400 million settlement between Orange County, California and Merrill Lynch regarding Merrill’s advice on managing the county’s cash flows, leading to over $1 billion of losses for the county.)

Www.focusonfiduciary.com defines fiduciary as follows: “A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.”

One of RAFSA’s goals is to protect investors. Currently, when brokers and insurance agents offer you investment “advice,” they don’t have to believe that it is in your best interest. They can recommend securities designed to line their own pockets instead of investments that would be best for you. One estimate is that this results in $25 billion being lost by investors annually that instead lines the pockets of such salespersons. The House version of RAFSA is stronger in this regard than the Senate version—the House insists on the fiduciary standards for all investment advice while the Senate version calls for an 18 month study. Fortunately, there is an amendment from Senators Akaka, Menendez, and Durbin which would insist on this vital investor protection, so that all ‘financial advisers’ that investors rely upon for investment recommendations are required to place your interests first.

I have practiced as a fee-only financial advisor for seventeen years, and have always acted as a fiduciary, as required of investment advisers under the Investment Advisers Act of 1940. The Akaka-Menendez-Durbin amendment is necessary to require all securities brokers who provide personalized investment advisors to retail clients to be held to the same standard. America’s investors deserve no less. The Financial Planning Coalition, comprised of NAPFA, the CFP Board, and FPA®, supports the Akaka-Menendez-Durbin amendment.

Without this amendment, the Senate version of the bill calls for (yet another) 18-month study, a delay that is exactly what stockbrokers and insurance agents want. What do you want? If you want a client-first fiduciary standard of care, let your US Senator know that we need the Akaka/Menendez/Durbin amendment added to RAFSA now!

Paul S Baumbach, CFA, CFP®, ChFC
Mallard Advisors, LLC
Newark, Delaware