FINRA’s Ketchum Speaks of Fiduciary Duty 

This news originally appeared on WealthManagerWeb on 10/28/09

Speaking of the catastrophic difficulties in the financial system over the past two years and the resulting “severe erosion of confidence in the entire financial system,” FINRA Chairman and CEO Richard Ketchum addressed the Securities Industry and  Financial Markets Association’s (SIFMA’s) annual meeting on October 27, in New York. He challenged broker/dealer industry leaders to “win back” investors’ confidence.

In his speech, Ketchum talked about the “new  paradigms” in the financial services world, and asserted that “we must push ourselves honestly to ask what lessons we have learned and resolve to chart a specific and concrete path forward that focuses fundamentally on investors.” 

Then, Ketchum cautioned the assembled broker/dealer executives to be mindful that they are operating “in a complex environment replete with conflicts that need to be controlled and properly disclosed.” Noting the pressures firms are under to grow earnings, he chided firms about the “explosion of proprietary structured products and variable annuities as well as a menagerie of exchange traded funds.”

In possibly the strongest words Ketchum has had about the re-regulation of  financial services, he cited the Rand Study’s conclusion that investors are confused about the roles of the professionals who provide advice to investors. Ketchum told the audience that, “FINRA whole-heartedly embraces the Administration's goal of harmonizing regulation” of broker/dealers and investment advisors. He added, “most investors cannot distinguish between the investment advisory service they receive and their brokerage service. But broker-dealers and investment advisers are regulated differently and held to different standards.” 

“As you know,” Ketchum explained, “the Administration has proposed that the SEC write rules establishing consistent fiduciary standards of care for investment advisers and brokers providing investment advice. FINRA stands in agreement with numerous interested parties, including SIFMA, that the standard of care in both channels should be a fiduciary standard for the provision of advice.” These are important words and they have the power to make a difference for every American investor. This editor is a member of The Committee for the Fiduciary Standard. 

Ketchum, of course, understands what is at stake and the kinds of cultural and ideological changes that the process of B/Ds moving to the fiduciary standard will entail. The difference from caveat emptor and the suitability standard to a fiduciary duty to clients is not just a change in compliance rules or regulation or law. It is a change at the most fundamental level of intent, understanding and behavior. “While I believe all present business models can thrive in a properly designed customer-facing fiduciary standard, there also should be no question that this will involve real change. There is an important cultural change from shifting the question from is a product ‘suitable’ or ‘ok’ to is it ‘in the best interests of the customer,’” according to Ketchum.

Echoing SEC Chairman Mary L. Schapiro’s speech, which opened the SIFMA meeting, Ketchum focused on “sales practices’ for certain products that will receive special scrutiny: variable annuities and life settlements, especially as sold to baby boomers. He advised executives to look at the products and how they are marketed on an ongoing basis, as the products and needs of the clients shift over time.

“Shift” and “fiduciary” were the watchwords of this speech—in fact Ketchum invoked the word “fiduciary” 12 times in this speech including here: “there needs to be a shift in the way some firms approach their development of new products and the way they market these products to the public. Your integrity and commitment to good business practices should be the first line of defense in investor protection, and I urge you to view your responsibilities in a true fiduciary spirit.” 

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of WealthManagerWeb and a member of The Committee for the Fiduciary Standard.