Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, February 5, 1993 TAG: 9302050411
SECTION: EDITORIAL PAGE: A-11 EDITION: METRO
SOURCE: RICK BOUCHER
DATELINE: LENGTH: Medium
THE UNDERSIDE OF FINANCIAL PLANNING
MORE AND more people are using financial planners and investment advisers to help them plan for their children's education and for their retirement years. Since 1981, the financial planning industry has grown dramatically from 5,100 to 17,500 registered investment advisers, and the assets they manage have increased from $450 billion in 1981 to more than $5 trillion today.Meanwhile, the Securities and Exchange Commission has acknowledged that it does not have the resources to police the industry adequately.
The number of consumers who are losing their life savings through the activities of dishonest financial planners also is increasing. While most financial planners are conscientious and law-abiding, recent studies indicate that consumers may be incurring avoidable losses of up to $1 billion annually as a result of financial-adviser activities.
These losses occur in a variety of ways. Some are the result of outright theft. Others are the result of the churning of client accounts, which exhausts the funds through unnecessary expenses. Some arise through adviser incompetence.
A more typical form of abuse is a conflict of interest, which occurs when a planner encourages a client to purchase a financial product for which the planner receives a special fee or commission when the product is sold. In many instances the investment is totally unsuitable for the client, and the client is not informed of the special payment the adviser receives. While the adviser advertises himself as an objective source of financial advice, he is actually a salesperson for certain financial products.
In order to address these significant problems, on Jan. 26 I introduced the Investment Adviser Regulatory Enhancement and Disclosure Act of 1993.
First, the bill provides additional resources for investment-adviser supervision by the SEC through the payment of a modest annual fee by advisers. Advisers currently pay a nominal one-time fee.
Second, it requires the SEC to conduct regular examinations of investment advisers, as well as more frequent inspections of advisers who have custody of client funds, in order to stem abuses before they occur. We also require the SEC to conduct surveys to determine the extent of, and reasons for, the failure to register of persons required to do so under the Investment Advisers Act of 1940, and to report to Congress on the results of those surveys.
Third, we impose a suitability requirement to ensure that the investment products advisers recommend are suitable for the clients to whom they are being recommended, so that, for example, unsophisticated investors are not sold exotic, high-risk investments.
Fourth, we require investment advisers to give to prospective clients information concerning their education, business background, compensation arrangements and the services they are offering. They also must disclose any conflicts of interest that could reasonably be expected to impair the rendering of disinterested advice.
Fifth, we require investment advisers to disclose to their clients, before a purchase or sale, the amount of sales commissions and fees they will be charged, whether the adviser will receive all or a portion of those commissions and fees, and whether the adviser will receive any third-party payments, such as fees from the issuer of a security, for each transaction the adviser recommends. This information will enable clients to evaluate better whether the advice they are receiving is objective or has been influenced by the financial interest of the planner.
Sixth, investment advisers must provide their clients at least annually with written reports that include the sales commissions and fees paid by the clients, as well as any other amounts received by the adviser with respect to the clients' accounts, and a statement of the clients' holdings at the beginning and end of the reporting period. The purpose of this provision is to provide investors with a document they can use to compare the costs charged by their investment adviser with those charged by other advisers for comparable services.
Finally, we require investment advisers who have custody of client assets or who exercise investment discretion to obtain a fidelity bond in order to protect consumers from unscrupulous acts.
This legislation will effectively address the growing abuses which are now common in the financial-planning industry.
Rick Boucher, an Abingdon Democrat, represents Virginia's 9th District in the U.S. House.