Wall Street Professional Standards of Conduct

Wall Street firms spend a lot of time talking about ethics, values, integrity, and developing the right culture and doing the right thing. But according to Wall Street in Crisis: A Perfect Storm Looming (Jordan Thomas,  July 16, 2013), those catch words are largely lip service. Twenty-six percent of industry insiders surveyed for the report said they believed the compensation structures in place at their companies incentivize financial salespeople to compromise ethical standards or violate the law. If that's not startling enough, twenty-eight percent of survey respondents indicated that the financial services industry does not put the client interests first. These results are a telling reminder of the pitfalls consumers face when entrusting their money to the financial services industry.

The training financial salespeople receive at Wall Street firms sets the tone. Many learn early on that when they are making money for their firm, even if it’s over the line, their leadership is likely to look the other way. That’s why we have regulators, right? Yet the government's difficulty in imposing stronger investor protection regulations on banks, broker dealers, stockbrokers, and other financial salespeople (including fee-based planners) demonstrates the vast power of industry lobbyists and special interest groups.

Wall Street would like us to believe they have cleaned up their problems. But if Wall Street insiders themselves are distrustful of Wall Street, is there any reason you should think differently? It defies common sense that anyone would act on investment advice from a person or firm that does not operate solely under a Fiduciary standard.

Contrasting Models: Understanding Investment Advisor Ethical Standards

Investors may assume that all financial professionals who use generic job titles such as financial planners, wealth managers, and investment advisors are mandated by U.S. security laws to act in the best interest of clients. This is not true.

This issue is important because the financial services world often communicates misleading messages implying that customers’ interests come first. In fact, self-interest and personal profitability come first for many financial professionals. And because that’s true, the risk of portfolio loss is often much higher than the investor knows.

Legal standards of care in the investment world can be divided into two broad categories, each reflecting a fundamentally different belief system regarding the ethics of delivering investment advice. The two concepts are referred to as the Fiduciary Duty and the Suitability Rule. Knowing the difference between the Fiduciary Standard and Suitability Rule is crucial to selecting the right advisor.

The Fiduciary Investment Advisor Standard

The Fiduciary Standard of conduct is based on trust law. In the marketplace of professional relationships, Fiduciaries are required to deal with their clients at a level high above ordinary standards.

In the Investment world, the Fiduciary Principle dates back to the Investment Advisors Act of 1940. Under this Act, investment advisors who earn an agreed-upon fee are obligated to develop investment plans, formulate investment strategy, and select investments according to a “best interest” standard which is based solely on principles of due care, loyalty, and utmost good faith to clients at all times.

The 1940 Act also requires advisors to provide full and fair disclosure of all material facts on a recommended course of action. This avoids conflicts of interest that could impair independent and objective advice rendered to a client. Collectively, the principles of the Fiduciary Standard are designed to remove greed and opportunism in the marketplace by protecting investors from lesser standards.

The Broker Suitability Rule

The Suitability Rule, the standard of care under the Securities Exchange Act of 1934, applies to stockbrokers, insurance salespeople, and fee-based planners. Fee-based planners are duly registered under the Fiduciary Standard and the Suitability Rule, because they charge fees for investment advice and collect commissions from the sale of financial products.

The standard of conduct under the Suitability Rule is often defined as an arms-length transaction. In arms-length relationships, the parties involved are not under any special duty to take care of each other. Recent Senate hearings involving senior executives of leading Wall Street Firms including Citigroup, Goldman Sachs, Morgan Stanley, J.P. Morgan Chase and Bank of America bring attention to just how business is done under the Suitability Rule, and raises significant doubt regarding its effectiveness. For example, in 2007, all these firms sold packages of toxic mortgage-backed securities to unsuspecting customers, knowing these toxic securities would in all likelihood go bust. These firms were afforded protection by the Suitability Rule.

The Suitability Rule is a lesser standard of care. A lesser standard of care opens the door to conflicts of interest and paves the way for low quality recommendations. It does this by enabling financial salespeople to sell financial products that maximize their own profit, rather than delivering services and strategies in the best interest of the client.

Under the Suitability Rule, financial salespeople have relatively broad discretion to pursue their own self-interest. This doesn't necessarily mean they’re unethical, but investors would be wise to remember that these salespeople are under intense pressure to generate profits in a highly competitive industry. Unfortunately, products that maximize profit for the financial services industry are rarely in investors’ best interest.

Cardiff Park Advisors is a Fiduciary Investment Advisor

Cardiff Park Advisors is a Fiduciary, meaning we put our clients first. Our process begins by helping individual clients establish goals within the framework of their unique life circumstances. We discover and quantify investor needs, evaluate and model a variety of investment solutions, and help our clients make key decisions that will build long-term wealth

We want every client to have a positive investment experience. This may mean something different to each person. Generally we find that most people react positively when they understand their investment strategy and commit to building wealth over time, without a lot of anxiety and doubt. Our overarching goal is to help clients solve financial problems, reach financial goals, and avoid costly mistakes by bringing knowledge, direction, discipline and the fiduciary of ethics to the investment process.

Learn More About Us

Cardiff Park Advisors is located in San Marcos, 25 miles north of San Diego. We work with clients throughout the United States. We welcome the opportunity to discuss your financial goals and how we can help you reach them. You may reach us by emailing our principal at jgorlow@cardiffpark.com or calling our office at 760-635-7526.