Today's financial landscape can be confusing. We believe both the regulatory structure and Wall Street have made it this way. In our opinion, looking at recent history, Wall Street is not in the advice business, as most investors think. Instead, Wall Street is in the business of manufacturing and selling products. In our minds there are two types of financial professionals, those who have a fiduciary obligation and those who do not. Let us explain further.
To separate the various types of advisors, the easiest approach is to investigate two items: 1) how is the advisor compensated and 2) what legal standards are they required to uphold?
Brokers are subject to FINRA Conduct Rule 2310(a) (emphasis ours):
In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his security holdings and as to his financial situation and needs.
Does this sound a bit subjective to you? Who determines what is "reasonable grounds" or what is "suitable?"
SS&A is a Registered Investment Advisor (RIA). RIAs are held to a fiduciary standard. A recent speech given by the Chairman of the U.S. Securities and Exchange Commission (SEC), explains the difference between the two standards. Note her comments on the differences within the advisory industry and how the fiduciary standard is superior to the "suitability" standard (emphasis ours):
...imagine an investor walking down Main Street in the town where you grew up. He steps into the office of the local securities professional and is handed a business card.
But he doesn't look to see whether it says broker-dealer or investment adviser. Chances are he doesn't know the difference. Or even care. All he wants is helpful, investor-focused advice, a fair deal and a professional he can trust.
These seem to me to be reasonable expectations. But today that investor — whether he knows it or not — is treated differently depending on what that business card says. If it's a broker-dealer, he's sold a product that is, "suitable" for him. If it's an investment adviser, he gets treated under a higher standard — the fiduciary duty standard — meaning that the investment adviser has to provide advice that puts the investor's interest first.
Investors today should not be treated differently based on what door they walk into — or based on what is written on the business card they are handed.
At SS&A, we do not collect fees from transactions; there are no kickbacks or hidden commissions. We charge a flat percentage fee on the average monthly balance of the account irrespective of transaction volume or product. It's clear this structure aligns the interests of the client (you) with the incentives of the manager (us). There is no benefit for us in excessive trading and no incentive to put a client in high fee products - especially when we have no products to sell!
At Smith, Salley & Associates, our only business is you.