The comments have come streaming in on how a new fiduciary standard should be harmonized now that the Securities and Exchange Commission have been given the green light for its study.

As it stands, investment advisors (or advisers) are fiduciaries while broker-dealers may or may not be, based on the circumstances of their relationship with particular clients. Investment advisors want the single, one stringent standard of care applied to everybody but the broker-dealers say suitability is enough.

Of course, the SEC is now assigned to study the big picture. While everyone assumes harmonization is on the horizon, the large broker-dealers are lobbying hard to fashion a standard they can live with.

Just take a look at what the big brokerage firms are saying in their comment letters. Realize this. They aren’t welcoming a blanket standard at all and they want to protect business the way it is.

Consider what Robert McCann, the chief executive officer of UBS Wealth Management Americas, said in his Aug. 30 letter. “While we believe that some investors are well served by single-service investment advisers, many investors appropriately choose multi-service securities firms that provide a much broader array of products and services under one roof than most investment advisers can provide.”

McCann goes on to say: “Nothing should be done to discourage investors from continuing to choose that more comprehensive model so long as investors are informed of the conflicts that arise in multi-service securities firms, are aware of multiple streams of income for different services, and are informed about how conflicts are managed.” 

McCann takes another swipe at his opponents in this regard. He writes: “In seeking to protect investors. . .the Commission should address the current under-regulation of investment advisers relative to the existing regulation of broker-dealers.

Independent giant, LPL Financial, in its comment letter, says it is “concerned that subjecting broker-dealers to a fiduciary standard without addressing the regulatory disparities could lead firms and individuals to give up their broker-dealer and registered representative licenses and offer advisory services exclusively.. . There is also a potential to limit access to product[s] or services if brokerage services are not available.”

David M. Carroll, senior executive vice president for wealth, brokerage and retirement at Wells Fargo, is equally direct in his comment letter for his firm. “The adoption of a uniform standard of conduct does not, and should not, require that all broker-dealers become investment advisers or that an investment advisory relationship be identical to a client's relationship to a broker-dealer providing investment advice,” Carroll writes. “Clients have chosen to use broker-dealers because broker-dealers provide services, products and compensation models that clients want. Requiring broker-dealers to register as investment advisers, thereby subjecting the entire broker-dealer business model to the Advisers Act, would greatly reduce the available account types, products and service options while increasing costs for certain clients.

In the end, crafting a new standard is supposed to provide greater protection for investors. However, with 2010 more than half over, notice that breach of fiduciary duty claims top the list of complaints in FINRA arbitration disputes. Some 1,920 charges of this type were filed to the self-regulatory agency through July of this year. Claims of unsuitability, meanwhile, came in seventh at 1,147.

So, if clients are unhappy with their investment results, they will go after both the firm and the advisor under either theory, which says some duty of care, was violated or not adhered to in the appropriate manner.

The real issue comes down to clarity.

According to a survey conducted in April by Envestnet Inc., a Chicago-based provider of services for financial advisors, some 63% of wirehouse advisors polled say that, to the best of their knowledge, all financial advisors are subject to the same obligation to act in their clients' best interests.

Fewer than half of all advisors in the survey said they were "very well prepared" to act as a fiduciary in the following scenarios:

    * Developing a full view of the client's life goals and/or financial situation (47% total and 44% wirehouse)

    * Development of an investment policy statement (36% total and 29% wirehouse)

    * Maintenance of that policy statement (33% total and 25% wirehouse)

    * Ongoing client communications (46% total, 45% wirehouse)

    * Updating the financial plan for changing circumstances (44% total and 42% wirehouse)

    * Disclosure of investment costs (45% total, 42% wirehouse)

    * Disclosure of fees (49% total, 40% wirehouse)

What's more, 63% of all advisors responding to the survey said they wished their firms would give them “a roadmap or checklist on how to fulfill” their fiduciary obligations.

At the same time, Envestnet also discovered that the investors who were also surveyed are just as confused as advisors about the fiduciary standard. Only 36% of investors say that all advisors must meet the same obligation, and 73% of investors say that they are either not very familiar or not familiar at all with the debate.

For the SEC, the real triumph will be coming up with a standard that clearly explains to investors, the firms and the advisors what the responsibilities are for all advisors no matter what part of the industry they hail from.



The UBS Fallout (Aug. 27)

What the IRS wants, the IRS gets.

Just Thursday, it was announced that the federal government would soon be able to drop its legal action against UBS now that Swiss authorities have turned over more than 2,000 names of Americans who had secret offshore accounts at the Swiss bank.

While this is great news for UBS, which is trying to repair its image with a new ad campaign, it’s not so fabulous for the clients whose names may be on the list. (Nor is it great for Swiss banking secrecy laws and those of other countries.)

As Dow Jones reported Thursday: “Switzerland said it had worked through all of the 4,450 sets of data, handed over roughly half to the U.S., and was talking to officials there about how to conclude the agreement. Switzerland said the remainder of the data—believed to be most of the 4,450 cases—will be handed over by this fall.”

This was the statement from UBS. It said: “UBS is pleased to learn that the SFTA has completed its administrative assistance process relating to approximately 4,450 UBS client account files within the deadline set in the treaty with the U.S.. . .The delivery by the SFTA of all remaining account information to the U.S. Internal Revenue Service (IRS) continues. The withdrawal by the IRS with prejudice of the remainder of the John Doe Summons as provided for in the treaty is expected to occur soon.”

So for UBS the worst is over because the IRS is ending its case against the firm and only a data dump remains.

But for the clients, it’s another story. And, for them, the headaches have just begun. Approximately 18 are facing criminal charges and some have pled guilty.

But what about the rest? What does this latest hand0ff of data mean for those clients who haven’t come forward and are on the latest list going to IRS? Well, it means they better get moving.

“It’s just a matter of time before the U.S. finds you,” warns Kevin Packman, a partner in the private wealth services group at law firm Holland & Knight. Packman, whose specialty is international private wealth and compliance, has helped 150 or so clients with offshore accounts reach settlements with the IRS.

“If you had an account at UBS and you are among the 4,450 things can get ugly pretty quickly,” Packman says. How ugly? “On the most extreme end it could mean jail,” he says. But the monetary penalties aren’t pretty either. They could be as high as 50% of the account balance for each year (under Foreign Bank Account Reports or FBAR) plus 75% of the omitted tax for each year (under civil fraud charges). And, don’t forget, you still have to pay the actual taxes.

All that, plus having your name splashed over the mainstream media—without even getting a reality show.

“Voluntary disclosure remains a great option,” Packman says.

The IRS had set up a settlement program but that closed last year.  “My problem with the settlement program,” Packman says, was that under that approach “all taxpayers were created equal. If you intentionally evaded tax it was great. You got minimum penalties and no jail.”

However, if you just made a mistake out of sheer ignorance, it was a lousy deal. That’s because prior to the UBS case, that kind of taxpayer could have worked out a much lesser penalty.

Packman, who works out of his law firms South Florida offices, says he has seen a number of clients who didn’t intentionally evade taxes. “We have a number of taxpayers who’ve come to the U.S. to avoid things in their home country like a dictator or increased crime,” he says. Although they intended to return to their home countries, the years passed and they stayed in the U.S. but weren’t filing the proper tax documents for funds left behind in their homeland.

Then there are the taxpayers who are U.S. citizens by birth but their parents aren’t and money is in an overseas account. Also, there are those American expats who studied abroad and stayed and didn’t file the proper tax returns.

Packman also has a number of clients who are Holocaust survivors or heirs of those survivors who kept money in Swiss bank accounts for “security and safety,” he says. 

“If you just have to pay money that’s a pretty good result at this point,” Packman says. But, now that the settlement program is over, “it really will be facts and circumstances,” he says.

As for financial advisors, there is nothing improper about an advisor telling a client to have overseas investments, Packman says. Investing is a global phenomenon now. According to the 2010 Capgemini World Wealth Report, high-net-worth individuals “overall had proportionally more invested outside their home regions by the end of 2009 than they had a year earlier.”

Nevertheless, Packman cautions, “taxpayers should not be taking legal advice from a banker.” With new treaties and whistleblowers and even new laws like the Foreign Account Tax Compliance Act, Packman says, it “will make it impossible for a U.S. taxpayer to have foreign investments and the U.S. not to know about it.”


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