Seeking to spur the SEC into action on finally creating a universal ethics code for financial advisors, the Institute for the Fiduciary Standard (IFS) has released 11 best practices that they hope professionals will adopt even without government intervention.
In a statement, IFS president Knut A. Rostad said Jan. 29 that the standards were also issued to help combat a perceived problem among investors who don’t know the difference between brokers and advisors, and who wind up distrusting both.
The best practices, which were developed over the course of a year by a five-member committee, aim to cover both technical requirements of an advisor, including having proper education, credentialing and experience, and ethical requirements, which ask a professional to act with honesty and integrity. They are:
1. Affirm that the fiduciary standard under the Advisers Act of 1940 governs the professional relationship at all times.
2. Provide a “reasonable basis” for advice in the best interest of the client.
3. Communicate clearly and truthfully, both orally and in writing. Make all disclosures and agreements in writing.
4. Provide, at least annually, a written statement of total fees and underlying expenses paid by the client. Include an accounting or good-faith estimate of any payments to the advisor or the firm or related parties from any third party resulting from the advisor’s recommendations.
5. Avoid all conflicts and potential conflicts. Disclose all unavoidable potential and actual conflicts. Manage or mitigate material conflicts. Acknowledge conflicts of interest can corrode objective advice.
6. Abstain from principal trading unless a client initiates an order to purchase the security on an unsolicited basis.
7. Avoid significant gifts, third-party payments, sales commissions or compensation in association with client transactions that cannot be directly credited back to the client or managed as a fee offset.
8. Ensure baseline knowledge, competence, experience and ongoing education appropriate for the engagement.
9. Institute an investment policy statement or an investment policy process that is appropriate to the engagement and describes the investment strategy. Consistently follow and document a prudent process of due diligence to research and analyze investment vehicles; on request, document the prudent process applicable to any recommendation.
10. Have access to a broad universe of investment vehicles that provide ample options to meet the desired asset allocation and in consideration of widely accepted criteria.
11. Consider peer group rankings in ensuring compensation and expenses are reasonable.
The IFS is seeking comments from the industry and the public from now until March 9. Submissions should be sent to [email protected]. And let us know your thoughts by posting in the comment box below.
