Company's 401(k) Plan.
01 July 2010
There’s been quite a bit of news lately about the standard of care investment advisors owe to their clients. In technical jargon, current regulations provide two differing standards of care dependent upon which set of regulations governs an “investment advisor.”
The “Fiduciary” standard is applicable to all registered investment advisors, including Smart Investor, (who owe their primary loyalty to their clients) and requires the advisor, on an on-going basis, to put their client’s interests first, act as a prudent professional, provide full and fair disclosure, avoid conflicts of interest, and, when faced with unavoidable conflicts – resolve them in favor of the client.
The “Suitability” standard is applicable to advisors at broker-dealer firms (some who owe their primary loyalty to their firm) to assure that their recommendations to their clients are appropriate and “suitable” given the client’s current overall financial situation, investment objectives, and investment experience.
While each approach has its merits, the general consensus among many financial industry observers is that these technical distinctions are generally lost on the “typical investor” who assumes that their advisor is required to act in the client’s best interest. Hence, the recent interest in Congress and the media’s much-highlighted repeated statements by Goldman Sachs that “we’re not a fiduciary” regarding their activities in the subprime mortgage securities.
Based on the recent actions of the Senate-House Conference Committee, and the House’s passage of the legislation just before the 4th of July, it appears that this standard of care issue is about to be settled (at least “sort of settled”). The US Securities and Exchange Commission has been directed to study the issue and report back to Congress within six months from the date the legislation is approved. The new law grants specific authority to the SEC to promulgate appropriate regulations applying the “Fiduciary” standard to all “advisors” who make investment recommendations or provide financial planning for individual investors.
The ultimate result of all of this is not yet clear. Not to worry. Our old friend “Supply and Demand” isn’t waiting on Congress and the regulators. Acting at the request of a major public retirement system, Matthew D. Hutcheson, who is recognized as the nation’s leading independent fiduciary, has developed a new tool designed to help individual investors and company-sponsored retirement plans locate investment advisors who have been independently verified as investment advisor fiduciaries.
Recognizing that individual investors and retirement plan sponsors often lack the time, resources, and/or insights to properly perform essential “due diligence,” this new tool, e-Luminary, (www.e-Luminary.com) identifies and provides professional background information on advisors by geographic location and services offered. Each professional advisor submits to a rigorous vetting and due-diligence process that the investor or retirement plan sponsor would otherwise have to perform themselves. Hutcheson has leveraged his well-know expertise in vetting, evaluating, hiring and monitoring investment professionals into an extremely user-friendly and free service that allows an individual investor or retirement plan sponsor to immediately gain the “due diligence” information they need in selecting their investment advisor.
It’s interesting to note that Hutcheson is not an investment advisor and he didn’t create this service with the intent to gather new retirement plan sponsor clients. Rather, it was developed to ease the burden on individual investors and retirement plan sponsors to identify well-qualified investment professionals who have adopted and practice the “Fiduciary” standard. The investment professionals in the e-Luminary system have undergone the same vetting and screening process Hutcheson uses when he hires an investment professional. He is frequently asked “who would you hire?” Every single professional in the e-Luminary database meets the necessary criteria to serve as a loyal investment fiduciary. The due-diligence has been done, knowledge and training verified, honesty and background checked, and proper fiduciary loyalty confirmed.
The benefit to an investor or plan sponsor is the peace of mind in knowing that Matthew D. Hutcheson, LLC, backs each and every e-Luminary investment professional with its full professional faith and credibility. Investment professionals that fail to meet any necessary criteria at any time – will be removed from the database. Equally important, each investment professional is re-vetted annually, including a new background check.
Smart Investor is proud to be one of the initial investment advisory firms asked to submit to the e-Luminary vetting and screening process – and even happier to note that we “passed the test.”
Over the next few months you’ll likely see mention of and news media stories about e-Luminary, its value, and features. As word gets out, we expect that it will become an increasingly utilized tool that should greatly ease answering the question of “who would you hire?”