I was recently reminded of a 50-year old case in which financial planning, while in its infancy, was seen as a fiduciary status relationship, and when the SEC held the view that financial planning should not be utilized as a methodology to sell securities.
The use of financial planning services as a means to sell securities in order to generate profits by brokers was criticized early on by the SEC. The SEC wrote:
Between May 1960 and June 1964, registrant, together with or willfully aided and abetted by Hodgdon, Haight, Carr, Adam, Harper, Kitain, Davis and Kibler, engaged in a scheme to defraud customers who utilized registrant’s financial planning services in the purchase and sale of securities, in willful violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(c)(l) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder. The record shows that the gist of the scheme was respondents’ holding themselves out as financial planners who would exercise their talents to make the best choices for their clients from all available securities, when in fact their efforts were directed at liquidating clients’ portfolios and utilizing the proceeds and their clients’ other assets to purchase securities which would yield respondents the greatest profits, in some instances in complete disregard of their clients’ stated investment objectives. This scheme was implemented by, among other things, registrant’s advertising and by its training course for salesmen …
It is abundantly clear from this record that under the guise of comprehensive “financial planning” encompassing the purchase of varied securities, including listed securities, the above respondents induced customers, who were generally inexperienced and unsophisticated, to believe that their best interests would be served by following the investment program designed for them by respondents. In fact, such programs were designed to sell securities that would provide the greatest gain to respondents, rather than to promote the customers’ interests; indeed, in some instances, the recommendations were directly contrary to the customers’ expressed investment needs and objectives.
In the Matter of Haight & Company, Inc. (Feb. 19, 1972).
How can we return to this common-sense approach to ensuring fiduciary duties are properly applied at all times when financial planning services are provided? What we need now is for policy makers to acknowledge that:
(1) At its core, fiduciary is a status relationship. Fiduciary duties, once imposed, extend to the entirety of the relationship.
(2) It should be very, very difficult to remove the fiduciary hat and to continue to provide advice or guidance to the entrustor (client).
(3) Financial planning, by its very nature, involves the establishment of a relationship of trust and confidence to which fiduciary duties should attach.
(4) Once fiduciary duties exist, conflicts of interest – as arise whenever third-party material compensation is received from the sale of an investment or insurance product – should be avoided. (See Fiduciary Papers #6 for discussion of this last statement.)
This page represents the personal views of Ron A. Rhoades, JD, CFP(r), and do not necessarily reflect the views of any institution, firm, organization, motley crew of characters, cult, gang or other nefarious gathering which Ron has ever belonged to or ever been kicked out of. Please visit this page to subscribe to future posts from Professor Money Bear.To contact Ron Rhoades about speaking engagements, media requests, information about the Personal Financial Planning and B.S Finance programs at Western Kentucky University, or for information about his investment advisory firm, Scholar Financial, LLC, please visit this page