The recent article, “Talking to Clients About Breaking Away,” [a blog on our website posted by Mindy Diamond on Sep. 3, and reprised in Mindy's column this month on page 80] certainly had some good points to highlight with clients.? But some of the points made in the article illustrate a pervasive misunderstanding in the broker world about the implications of working solely as a registered advisor without wearing a registered rep hat.
For starters, the advisor does not hire the custodian of the client's assets.? The client must enter into a custody agreement with the custodian of their choice.? You can certainly steer the client to the custodian you prefer, and you can even decline to do business with clients who do not select your preferred choice. But it is not your choice.
Furthermore, you will be excluding yourself from the possibility of managing certain assets if you do not understand that custody is in client control.?For example, any client with a 401(k) who wants to hire you for management will not be able to move the assets to a different custodian. Why? Well this brings me to another fundamental misunderstanding: what it really means to be a fiduciary.
This topic has received a lot of attention of late, in this publication and elsewhere. But much of the attention has been focused on the theoretical aspects of acting as fiduciary, and not the practical implications of such.? In the above 401(k) example, there will already exist a Trustee of the defined contribution plan that governs the 401(k).? The Trustee of the 401(k) is required to have custody and control of all plan assets, as it is a plan fiduciary.?The trustee, who must be qualified to act as such under IRS rules, is not going to permit plan beneficiaries to remove plan assets from their custody to other custodians selected by plan beneficiaries.?They may permit you, if the plan documents allow it, to direct transactions in the segregated account of the plan beneficiary who wants to hire you. So, if you agree to act as a fiduciary under Erisa (which you must acknowledge in writing under Erisa rules), you must be able to effectively manage assets that may not be held on the platform of your choice. And you will have to bill your client for your asset management in a way that is not tied to your preferred custodian's system for invoicing.
Another point has to do with the above-mentioned debate about what it means to act as a fiduciary.? While the article points out that the advisor must place the client's interests first, in reality, a fiduciary, like a trustee, is required to act in the sole interests of the client, not just their best interests or primary interests.? In fact, the language in the draft Investor Protection Act of 2009 reads as follows:
… that the standards of conduct for all brokers, dealers, and investment advisers, in providing investment advice about securities to retail customers or clients (and such other customers or clients as the Commission may by rule provide), shall be to act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice. [Emphasis added.]
The requirement to act solely in the interest of another will require you to thoroughly examine your business practices and carefully consider the changes that you will have to make in how you are paid, the investments you select, your due diligence process in selecting them, the documentation you maintain, and many other considerations which are best left to future articles or individualized guidance you receive from a knowledgeable expert.? In addition, you need to thoroughly understand the liability you have when the bar is raised to a fiduciary status, acting solely in the interests of the client.
So talking points for clients are certainly needed for your business transition, but be sure you totally understand all of the fiduciary implications of such a significant change in your business approach, including who really controls custody of client assets.