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Exclusive Interview: Brian Hamburger Says Private Industry Converging on Fiduciary Solution Ahead of Regulators

February 18
00:08 2015

The MarketCounsel Summit, one of the foremost gatherings for influential investment advisers, has earned the well-deserved reputation of attracting the most interesting, provocative, and knowledgeable speakers in the industry. This Brian-Hamburger_300x225month we’re honored to feature Brian Hamburger, the Founder, President and Chief Executive Officer of MarketCounsel, the leading business and regulatory compliance consulting firm to the country’s preeminent entrepreneurial independent investment advisors. He is also the Founder and Managing Member of the Hamburger Law Firm, a boutique firm practicing virtually all areas pertaining to investment and securities law as well as relevant corporate and employment matters. For six years running, MarketCounsel has been named one of the fastest growing private companies in the U.S. by Inc. Magazine. Brian has been labelled as “the real deal” and recently made news when the Institute for the Fiduciary Standard unveiled its 11 Points of Fiduciary Best Practices.

FN: Brian, you’ve seemed to have built yourself quite a successful career. What first drove you into the business? How did you come to where you are today?
Hamburger: I was inspired by my father, an independent broker-dealer rep and registered investment adviser and the challenges he and his peers faced. I watched as he served his clients with skill, outstanding service, and a deep passion for his profession. But I also saw where they struggled; in being entrepreneurs of small businesses in a highly-regulated industry, in having faceless legal and compliance groups give them thumbs up or down without consistency or justification and claiming cover under “compliance” even if the restriction had nothing to do with regulatory compliance. I became captivated with the notion of enabling true fiduciary advisers to go out and accomplish the type of success ordinarily reserved for the most well-known financial institutions. I started MarketCounsel to serve this special group. We’ve gotten where we are by never losing focus on who we serve, the country’s preeminent, growth-oriented, independent RIAs.

FN: What prompted you to begin to actively advocate for the Fiduciary Standard?
Hamburger: Working side by side with RIAs as they grow their businesses, I’m inspired every day. I’m amazed by the creativity that proliferates the space. Amidst the independence, the differences among them are overshadowed by the commonality of passion that unites them. But their story is not sponsored by outsized marketing or lobbying budgets. It’s an untold story that needs to find its lore and championed by the public. They need to be educated as to the differences between how those that market under the banner of “financial advisors” are obligated or incented to serve their needs.

FN: Tell us a little about the Institute for the Fiduciary Standard. How long have you been involved with it and what is your role?
Hamburger: The Institute is the type of champion that independent advisers need; a true advocate for those committed to acting in their clients’ best interests. I have the privilege of serving as general counsel to the Best Practices Board. The shared values among the Institute and MarketCounsel complement each other well.

FN: The Institute for the Fiduciary Standard recently came out with an 11 point Best Practices for Advisers and Brokers Seeking to Meet True Fiduciary Standard. Can you summarize for us the purpose and intent of this proposal?
Hamburger: The Institute’s best practices focus on addressing conflicts of interests, increasing transparency, and communicating clearly. The purpose is to have a concrete, understandable, and verifiable set of standards for financial advisers so that they can be sure their services are consistent with what’s required to satisfy a fiduciary standard of care.

FN: The Best Practices proposal came out just as the White House leaked its Fiduciary Rule memo. Why is the Institute moving forward independently instead of waiting for government regulators to declare where they stand?
Hamburger: This is a classic private industry response to converge upon a solution. If we waited for government regulators to get this done, we’d likely be waiting until the environment became unsustainable for consumers, fiduciary advisers, or both. We’re likely facing inaction by the SEC, and one could argue, what’s worse, the re-proposed new definition [of a fiduciary] coming from the Department of Labor, likely imminently.

FN: In essence then, you’re relying on the free market to enforce your proposal rather than the government.  What are some of the advantages and disadvantages of this approach?
Hamburger: The Board is actually creating consensus among private practitioners to create these Best Practices. The free market can move swiftly, nimbly, and not be influenced by any outside parties or forces. The disadvantage is that the cost of the program is borne by the private sector and not the government. But this is not a solution that benefits traditional global financial institutions and the government has shown that they’re interested in the issues that likely will become or have recently become headlines. So this is the private sector aligning with its interests with consumers. If enough voices demand a fiduciary standard of care, the securities industry will have no choice but to respond and government will follow. But for as long as there remains confusion about the fiduciary standard and why it’s such an important issue for consumers, it’s unlikely this will ever become a government priority.

FN: Already, we’ve seen SIFMA come out strongly against the Institute’s proposal. They claim the proposal will limit fiduciary status to fee-only advisers and exclude brokers. Knut Rostad, president of the Institute, says the proposals can apply equally to advisers and brokers. Does it matter? Why do we want the term applied to both? Isn’t there a fundamental difference between an adviser and a broker? Why couldn’t the “fiduciary” designation be applied to differentiate between the two types of service providers? In the end, if SIFMA disagrees, wouldn’t they be better served taking their case to the marketplace?
Hamburger: This is not an issue of registration status; it’s about where, in the list of priorities, are a client’s best interests. It’s unclear to me why a broker-dealer could not achieve the Best Practices as set forth by the Board. Admittedly, most would have some work to do on disclosure and voluntarily limit its participation in certain revenues that are permitted by law, rule, and regulation. But if consumers think they’re getting advice from a trusted advisor, shouldn’t that advice be free from undisclosed, material conflicts of interests? To call fiduciary and non-fiduciary financial advisors by the same name is akin to calling both doctors and pharmaceutical manufacturers as “healthcare providers.” Brokers who hold themselves out as rendering investment advice should be equally as compelled to act in the best interests of their clients, at all times – today they are not.

Having only “some” advisers beholden to the standard is the equivalent of having only “some” doctors held responsible for caring for their patients to the best of their ability. Interestingly, while there is currently no legal obligation for medical students to take an oath upon graduating, 98% of American medical students take some form of oath while only 50% of British medical students do. Our hope would be that the vast majority of advisers subscribe to these standards – and that the public is educated and able to differentiate between them and that this, in turn, compels financial advisors to adopt.

FN: The comment period on these 11 points ends on March 9, 2015. What happens next and how do you see the Best Practices being implemented?
Hamburger: The Board has an opportunity to regroup, assess the comments, and determine if any should be incorporated into the final version. Then, it’s on to creating assessment tools and a verification mechanism.

FN: What other thoughts, issues, and needs are there that you would like to share with our audience?
Hamburger: Hmmmm… where should I even start?

FN: Brian, thanks so much for allowing us to share in your knowledge and experience in these issues. We know our readers value insights from industry leaders like yourself.

Interested in learning more about important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His new book Hey! What’s My Number? –  How to Increase the Odds You Will Retire in Comfort is available from your favorite bookstore.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

1 Comment

  1. Dennis Myhre, AIC
    Dennis Myhre, AIC March 06, 11:35

    Chris,

    Your reference to Mr. Hamburger as a tea partier for the fiduciary standard is refreshing and should bring results. You also rightfully question the advocacy of our President for publishing his recent memo. One needs simply to recall Martin Smith’s documentary entitled The Retirement Gamble for an answer….AG Eric Holder opted for Non-Prosecution Agreements with the banks and financial institutions rather than indictments. Enough said on that subject.

    The White House memo in a small part correctly states the problem…. that a conflict of interest exists in the investment community. What is being ignored is the criminal element involving service providers while acting as “custodians.” Insurance companies are major players in the 401(k) market, their products typically offered through group annuities, and as such are not fully regulated by the SEC. In 2008, their offerings were almost exclusively separate accounts, not publically traded equities.

    During the 2008 crisis one insurance company, while freezing a real estate fund, used the 401(k) fund to pay off outstanding commercial loans they made to investors, basically using the fund as a TARP Bailout Program. The fund was used to guarantee loans made by banks to co-investors, and real estate investments with existing loans provided by the insurance company were purchased on behalf of the fund for inflated prices. The fund also purchased a commercial property with an outstanding loan provided by the service provider, bundled the investment in a CMBS, then failed to make a payment on their own loan for two years. The Trustee of the CMBS later filed a foreclosure action against the property, costing the fund millions of dollars. Meanwhile, the fund lost almost 50% in value during the 14 months in which withdrawals were restricted, costing 140,000 investors billions of dollars in lost retirement revenues. An investment advisor, while acting as a fiduciary, could not have protected their client from such actions by a service provider.

    Creating a public awareness of such atrocities against the system will help the free market to reach a balance, and as Mr. Hamburger states, the securities industry and government will have to respond.

    Dennis Myhre, AIC

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