What do you think of our site upgrade?
Hosting an industry conference? Ask us about including it in this ticker?

Exclusive Interview: Clark Blackman II Says SEC Fiduciary Fix “Not Tough Stuff”; Proposed DOL Fiduciary Rule a “Band-Aid”

Exclusive Interview: Clark Blackman II Says SEC Fiduciary Fix “Not Tough Stuff”; Proposed DOL Fiduciary Rule a “Band-Aid”
December 15
00:02 2015

For the past few years we’ve been privileged to join with several dozen industry thought leaders to discuss various fiduciary topics. One of the more stimulating speakers at these events is Clark M. Blackman II, the founder of Alpha Wealth Strategies, LLC an independent fee-only RIA firm. His depth of knowledge, willingness to ask blunt questions, and fearlessness to question established thinking regularly impresses. Past chair of the Executive Committee of the AICPA Personal Financial Planning Division, he is leader of the AICPA PFP Fiduciary and Competency Task Force responsible for editing the Fi360 publications “Prudent Investment Practices.” He is a member of The Foundation for the Fiduciary Standard Best Practices Board. On the Editorial Board and Subject Matter Panel of the Journal of Accountancy, he is a speaker and writer on fiduciary and personal financial planning topics, having authored more than 60 published articles. A member of The Committee for the Fiduciary Standard Steering Group since founded in 2009. Blackman holds an MA from the University of Iowa, and is a CPA/PFS, CFA, CFP, CIMA, and Accredited Investment Fiduciary.

FN: Clark, we like to have each of the folks we interview start by sharing with our readers a personal story that stands out in their mind as memorable or important to their maturation as they progressed on the journey that turned them into the professional that they are currently. What past experience or experiences are most responsible for leading you to where you are today?
Blackman: I ended up where I am by learning from a series of missteps. I started my career in the tax department of Arthur Andersen in 1980, and learned I did not care much for preparing tax returns, though I did like tax planning, and joined a financial planning firm in Denver, Colorado in 1983. Of course back in those days, virtually all financial planning firms were insurance driven, and planners were primarily commission driven sales people selling insurance products, limited partnerships, and 8.5% front-end load mutual funds. It took me two years to learn to loath the selling side of financial planning, though I loved the planning aspect. This taught me a very important lesson – you come to believe what is in your interest to believe; your objectivity and professional judgment is always at risk of being compromised if you put yourself in a conflicted situation where your interests are not 100% aligned with your client’s.

So in 1985 I joined a CPA firm in Chicago that had just established a group dedicated to financial planning, separate from the tax department. For five years we tried to make a go of fee-only planning in an hourly driven environment, only to find that in a firm where fees were $200 to $400 an hour (remember, this was the late 80’s), meeting profitability goals was extraordinarily difficult when insurance companies and brokerage firms were doing comprehensive plans for $195, if they charged anything at all. Profitability eluded us. I joined Price Waterhouse (which had established an RIA affiliate in 1986) in 1990 believing that fee-only, unbiased investment consulting advice could ultimately be something clients would actually be willing to pay for. Fortunately for me, in 1991 the FTC forced the CPA profession to allow fees based on methods other than hourly, and within a year we had signed up our first AUM client and were on our way to pioneering a new profit center for CPA firms – AUM driven investment advisory services combined with financial planning. It took me quite a few years, but I finally found a way to do something I loved that could actually be financially rewarding.

FN: Those outside the Lone Star State often hear how it offers a very friendly business environment in very broad terms. In what ways do you feel the Texas regulatory philosophy might represent a useful model for the investment industry in general?
Blackman: Regulators in Texas take their responsibility to oversee investment advisors quite seriously. In Texas, you can expect the Texas State Securities Board to some visit every three years, and that usually is on an unannounced basis. These surprise examinations are very thorough. Yet, I have found that Texas securities regulators see themselves as a resource for advisers, always willing to provide answers and input to help you understand and follow the rules. I have found them to be surprisingly open, honest and helpful. There is much more a sense of a partnership there than I have found with the SEC or FINRA (I was with a dual registered institutional consulting firm for a number of years before I started Alpha Wealth Strategies, so I came to know both regulators well, as one of my roles was chief compliance officer). This partnership is vitally important to a healthy investment environment, as honest advisers need to help regulators ensure that the miscreants and shysters are chased out of the business. Bernie Madoff and Allen Stanford have done significant long term damage to the investment adviser business. Finding the criminals before they get too large and entrenched is a vital role for the regulators. I would like to see an increasingly greater symbiotic, collaborative relationship between advisers and regulators, much like we see in the legal, medical, and CPA professions.

FN: Earlier this year at the TD Waterhouse Leadership Summit, you sat on a panel addressing alternative approaches to regulatory oversight of Registered Investment Advisers. Why is this an issue and what are the main discussion points?
Blackman: True professions demand a collaborative effort with regulators and professionals. It is in everyone’s best interest to have a strong and vital regulatory regime – one that targets, and ferrets out, the bad guys. This relationship creates a positive environment for growth of the industry while controlling that growth to ensure the public’s interest is being met along the way. Currently the SEC is able to examine about 9% to 10% of adviser firms that are registered with them. And though I believe that the SEC has done a good job of targeting examinations toward those “high risk” firms with the greatest likelihood of misdeeds, that still leaves an awful lot of firms that will go for many years without an exam. The SEC uses investor complaints as an indicator of who needs attention as well. Quite frankly, this is how the professions generally oversee themselves – through complaints to identifying offenders. And arguably, if a firm does not have custody, and does not have embedded conflicts arising from inherently conflicted compensation models, it is likely the major violations are recordkeeping and perhaps incompetence (which regulators are ill equipped to identify and discover anyway).  Most professionals, like CPAs, doctors, and lawyers are never reviewed or examined by regulators, but have professional oversight committees and processes to discover and punish the rule breakers.

The bottom line is that until the SEC gets around to examining some number of firms that equates to the number of exams FINRA does on brokerage firms, FINRA will make an issue of the lack of exams as a reason why they should be the examiner of RIAs; i.e. they are more than happy to relieve the SEC of this “burden.” The SEC, on the other hand, has many fish to fry, and they have prioritized other areas as more critical and presumably more prone to egregious violation than RIAs, so their budget gets allocated to other areas, leaving only so much to oversee advisers. This becomes leverage then for them to go to the Hill and ask for more money. My view is that we (the fee-only advisory industry) need to recognize where all of this is taking us. If we want to ensure adequate examinations are taking place to keep the industry clear of fraud and deceit, if we want to avoid having FINRA be the regulator of what is essentially a professional service model totally removed from the brokerage sales model FINRA was set up to control and regulate, then we have to be honest with ourselves. We, as professional advisers, need to get more involved. Then we need to encourage the states to take on more of the responsibility for protecting the citizenry of their states. Let the states determine who should be allowed to practice as an adviser, and oversee them as their citizens demand. Many in this business talk about becoming a profession. Well, look to the other professions and you’ll see they are invariably state regulated. In my view, it is apparent that legislators are NOT going to allocate enough additional funding to the SEC for the SEC to step up the number of exams, though it does appear the SEC is beginning to put a greater priority on this area. It is also apparent that “user fees” are not going to get approval from Congress, as these constitute a “tax” and are just another way to grow the regulatory bureaucracy in Washington. Finally, it is clear that FINRA is waiting in the wings for its opportunity to become the overseer of RIAs. The latest opportunity for FINRA lies in the concept of using “outside” examiners, independent of the SEC.

Any RIA who does not see this as a potential entrée for FINRA to become the examiner of RIAs firms needs to take a closer look at this option. There is no doubt that FINRA is in the mix as a service provider. This is the camel’s nose in the tent. Once in, they will find increasingly stronger arguments for why they should just do it all; i.e.; regulation rule-making as well as oversight. The cost of this in dollars, FINRA being the regulator, could be an existential threat to small RIA firms (say less than $1 billion in AUM), but the threat to the independent fee-only business model is just as great. A homogenized investment advisory world where brokers and registered advisers are all treated the same, and purported to all be alike, is a disaster for the “profession” of investment advice given, and a Godsend for the sales driven model that competes with it. The answer lies with the states. Here is where the common law duties of fiduciary responsibility reside, and where they should be enforced.

I’m not saying that the use of outside expert examiners to assist the SEC in targeted, anti-fraud examinations, designed specifically to discover egregious behavior isn’t a potential part of the solution. However, even this could be extremely expensive for small firms, and the firms would have little say about the cost, especially in markets where only one outside examiner is available. This should be paid for by the SEC, or at least prices set by them, and FINRA should not be allowed to participate as an examiner. FINRA is still the national association of really big securities dealers, and these guys are in direct competition with the fee-only RIA world. It makes no sense to me at all that the SEC would allow competitors to come into an RIA’s shop to “oversee” and evaluate them!  That is craziness.

FN: You’ve brought up the idea that there’s a relationship between the fiduciary standard and the “inadequacy” of audits. Elaborate on this.
Blackman: Sure. To me it is obvious. The brokerage industry, to whom “fiduciary duty” is an existential threat to their business, is desperate to stop the flow of clients, assets, and brokers from their industry to the RIA business model. Since 2000, a full decade and a half now, the trend away from brokerage to fee only advice has been adequately and clearly documented. One way to stop the flow is to eliminate the competition. And as the old saying goes, “if you can’t beat ‘em, join ‘em.” This is exactly why the issue of inadequate exams stays at the forefront, even though it is getting to be over a half dozen years since Bernie Madoff and Allen Stanford were in the headlines. If the national association of securities dealers can become the regulator (which was tried overtly with the Bacchus bill in the House Financial Services Committee where an “SRO” was being floated as a solution – all of us involved knew that the SRO was going to be FINRA, who was clearly pushing this idea in Congress), then they can write the rules and ensure the big brokerage firms are protected from this threat. A harmonized, homogeneous industry of “advisors” would be just the thing to stem the tide, don’t you think? And with it goes the fiduciary standard of behavior that requires absolute objectivity and fealty to the client – serving two masters is essentially forbidden under common law standards of fiduciary duty.

Look to the DOL’s ERISA rules for the real constraints a true fiduciary must adhere to. Though many consider those rules to be more restrictive than what is required of the 40 Act, I think otherwise. The ERISA rules have simply laid out the obvious requirements of the established common law of what is typically required of a fiduciary. Remember, there is no so called “fiduciary” duty defined in the 40 Act, though we refer to 40 Act fiduciary all the time. The duty is implied, and has been forever attached to the 40 Act adviser by the courts.

The concept of fiduciary behavior has been around for millennia, and the current judicial requirements of fiduciary behavior have evolved over many hundreds of years going back to pre-revolutionary English law. A breach of fiduciary duty can lead to very severe penalties, and the fiduciary is guilty until proven innocent. Being a fiduciary puts the adviser at a decided disadvantage in court, and is the reason the brokerage world will fight to the death to avoid a true fiduciary standard of behavior.

FN: Does this suggest a way to address the fiduciary standard using the existing regulatory framework?
Blackman: First of all, until the brokerage world stops trying to take over the advisory world, there is no safe harbor for the fiduciary duty. I see two solutions that the SEC can invoke right now to protect the fiduciary duty and to protect the investing public from bad advisors. First, make a clear and unequivocal statement that they believe they are doing an adequate job of adviser oversight. That they allocate their funds on a basis of risk, i.e. cost/benefit analysis. That is of course if that is what they believe. And personally, I believe that IS what they believe. And that is why every year they get more money, they allocate it elsewhere. They need to stop feeding into the FINRA story line that RIA exams are inadequate because fewer are examined than brokerage firms. Brokerage firms are in an inherently conflicted business model where the interest of the firm does not often coincide with the best interest of their customer. I would suggest that examining only 30% of the home offices of these firms each year may well not be enough. Perhaps that number should be something north of 50%, 60%, or even higher.

Second, enforce the 40 Act’s incidental advice rule and stop allowing brokers to call themselves “advisors,” or worse yet, “advisers.”  Clearly a person calling themselves an “advisor” is directly, overtly, and purposefully providing advice; it is not ancillary or “incidental” to providing other services. The public is confused by who is a fiduciary and who isn’t (whether they know or understand the term is not the issue – they do intuitively understand the concept). This is understandable, since the SEC allows anyone with a brokerage or insurance license to call themselves an “advisor.” How can the public possibly know that their “advisor” is really less an adviser and more a salesman working first for the employer who pays them based on the advice they give. They do have a fiduciary obligation, but as an agent of the brokerage firm this obligation is to their employer! This is not tough stuff. It is something the SEC could do tomorrow.

Finally, I’d like to see the states take up this mantle and ensure that anyone who calls themselves an investment “advisor” in their state be registered either with the SEC or the state, and ensure they behave as a fiduciary. No exceptions allowed. At the very least, a plan to increase the AUM limit for registration with the SEC, allowing more RIA firms to come under the authority of the states is an elegant answer – especially for those who foresee a time when there is a true profession of investment advisers. NASAA is doing a very good job of getting the states to pull in the same direction, and have had rules adopted that will help the large multi-state firm deal effectively and efficiently with state regulators. With RIA industry help, NASAA could resolve the remaining outstanding hurdles that advisers throw out as to why the states are not a viable solution. However, when confronted with that solution or a FINRA solution, advisers tell me they would gladly put up with state oversight even with its flaws.

FN: Along these lines, explain the history of the failed 1980s attempt by the CPA industry to be called “financial planners” and why that’s significant given the use of the term today.
Blackman: Well, in 1986 the SEC published SEC Release IA-1092. This release provides clarification of when CPA’s could and could not use the incidental advice rule provided for in the 40 Act. This is the same incidental advice rule that brokers use for not registering as advisers when they give investment advice. The presumption under this rule is that the investment advice is provided coincidental and ancillary to other services. So, even though CPAs had been providing personal financial planning advice to accounting clients for nearly a century, long before the term was coined by the insurance industry, the SEC decided that if a CPA held out as providing personal financial planning services then they could not use the incidental advice rule to avoid registration.

I find it more than a little strange that a CPA cannot hold out as being a financial planner and provide asset allocation advice without registering, but a broker can hold out as an investment advisor and give specific product recommendations and financial planning advice without registering. I’d like someone to explain the logic of that to me. I believe this is a vitally important concept. In the context of the 40 Act, clearly this rule was created to allow people in a non-investment advisory business model to provide some degree of advice that is ancillary to and coincident with the other services they provide. So, clearly, promoting the firm or the individual as an “advisor” would seem, on its face, to preclude use of the incidental advice exemption. And yet how many times a day do you see the big brokerage firms and insurance companies promote themselves as advisors, folks who have your back, will do whatever it takes to see you into retirement on a sound footing? And yet many of these folks are NOT RIAs subject to the fiduciary standard of care. It is unconscionable.

FN: Based on what you’ve seen and heard regarding the DOL’s proposed Fiduciary Rule and anything coming from the SEC, what outcome do you foresee concerning the establishment of a universal “fiduciary standard”?
Blackman: Of course the problem with the DOL proposed rule is that it only applies on a limited basis. So having an “advisor” who has to be a fiduciary regarding this group of assets because they are in a tax sheltered entity is a start, but it is a bit ridiculous to segregate assets on such a basis, when the need for competent fiduciary advice is equally as important for all the other assets the client has invested for the future. So it really is a Band-Aid. And, yes, of course, a Band-Aid might be better than nothing, but you can still bleed to death when what you really need is a tourniquet and stitches. Fortunately the DOL is not hamstrung by the same Dodd-Frank limits that have hamstrung the SEC. My biggest concern with a final DOL rule is that, in trying to please all constituencies, it allows for disclosure of conflicts to save the broker sales driven model. Disclosures do not work, and can even be counter-productive based on research by Yale professor Daylian Cain. The reason becomes obvious when you think about it. If you tell someone you are going to take advantage of them for your own gain, and they agree to that in writing, then you have a clear conscience to do your damnedest. Personally I do not see how we can have a “universal” fiduciary standard that accommodates a sales driven model. So my hope is, if DOL is in fact successful, they maintain all the protections the original fiduciary standard holds for investors today.

FN: Why might there be a possibility that current fiduciary advisers lose that very unique definition of “fiduciary” that today sets them so far above their non-fiduciary competitors?
Blackman: Dodd-Frank put the SEC in an untenable situation. They have been told that any “universal” fiduciary standard must be no less stringent than the standard that has evolved under the 40 Act, while at the same time allowing for the brokerage industry business model to continue unabated (I’m paraphrasing of course). This is the proverbial irresistible force meeting the immovable object. It can’t be done. The brokerage model is inherently conflicted, and the fiduciary standard does not allow disclosure to mitigate the responsibility to be independent and unbiased in the advice given to the client (or customer as the case may be). So a conflict that causes me to act in my best interest, or my firm’s best interest, and not in my client’s sole best interest has to be avoided – it cannot be disclosed away. A fiduciary cannot take shelter by getting the client to agree to be taken advantage of. It is a concept that has existed for thousands of years. In essence, the client or customer is to be treated as incompetent for these purposes. They cannot allow you to have a conflict that impairs objectivity and professional judgment that works against their best interest. For this reason I do not believe the SEC can come up with a rule that is workable under Dodd-Frank. I believe that Mary Jo White has wisely put this on the back burner because she is a very wise lady; though now it looks as though the end of 2016 has been thrown out as a deadline. A universal rule is an invitation to lawsuits, at least from one side of the aisle or the other, and maybe both! The DOL, on the other hand, is not similarly restricted, and that is why the brokerage and insurance industries have pulled out all the stops to fight them. The DOL has kicked a hornets’ nest. Hard. And the issue has become so politicized that I find it hard to believe the DOL will be able to make this stick, even if they approve the rule. Legislation from the Hill is most likely to stop whatever good in this area the DOL is attempting to accomplish. And of course as mentioned earlier my fear is they decide that disclosure becomes the salve that allows for what really is simply a suitability standard after all. This is the worst case scenario, because it would then allow brokers who are not registered to say they follow the fiduciary “best interests” standard, when clearly, in my mind at least, they do not.

FN: Do you think the administration might be using the divisive fiduciary debate as a digressionary ploy to justify the introduction competing government retirement plan products? If so, why do you think the government is intent on challenging the free market currently serving the retirement industry?
Blackman: That’s an interesting thought, and quite frankly that had not occurred to me. I have no opinion on that possibility, other than I hope it is not the case. Of course not everyone in Washington is intent on challenging free markets. But those who are seem to be indefatigable. There will always be a faction that believes the government can do things better than the free market. Though the free market is not infallible by any stretch of the imagination, it certainly seems to be the best of all the flawed solutions. But clear and reasonable restrictions on behavior, especially when complex and hard to understand concepts are involved, is a good thing that I think both sides of the aisle should be able to agree to.

FN: If you could offer a solution to the fiduciary debate, what would it be?
Blackman: I’d like to see:

  1. The SEC enforce its rule regarding incidental advice; i.e., any broker holding out as an “advisor” (investment, financial, or anything similar) who gives investment advice in any way, shape, or form must register. I’d also like to see the SEC come out with a position that, clearly and unequivocally, asserts that conflicts which impair an adviser’s objectivity cannot be mitigated through disclosure. As I have indicated above, this thinking is dangerous to the effectiveness of, and is in fact contrary to, a true fiduciary standard.
  2. The SEC and the states agree to raise the AUM limit for registering with the SEC from $100 million to a much higher level over a period of years that the states could absorb. I’d like to see that ultimately at $1 billion some number of years from now.
  3. NASAA invoke a clear and tough rule regarding the fiduciary standard that is uniform and consistently applied by all the states
  4. The SEC take sole responsibility for examining those RIAs that are registered with them; no SRO, no FINRA/national association of securities dealers solution of any kind, and limited use of “outside” parties to assist the SEC in their role of ferreting out criminals.
  5. An advisory group consisting of involved professionals like the Committee for the Fiduciary Standard and the Institute for the Fiduciary Standard and other thought leaders in the industry collaborate with regulators on establishing a true profession that can work with and advise the states and the SEC on professional standards, fiduciary responsibility, and oversight.

FN: Do you have any other thoughts, ideas, or rhetorical questions you’d like to share with our readers?
Blackman: I typically find that most investment advisers I talk to have little knowledge of the threats facing the independent, fee-only advice driven business model. The threats are very clear to those paying attention, and near term. And once advisers begin to understand the immediacy of the threat, they are anxious to get involved. I would ask the reader that if you are operating under the fiduciary standard as an adviser with a registered investment advisory firm, be vigilant as to what is taking place in Washington D.C. and understand that the future of regulation may dramatically change the very business model you have come to love; and the reasons you love it are the very same reasons it is under attack.

FN: Clark, this has been most enlightening. Thanks for taking time from your busy schedule to share your experiences and insights with our readers. I’m sure they’ve become much wiser in the ways of the fiduciary world as a result. I look forward to the next times our paths cross!

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


No Comments Yet!

There are no comments at the moment, do you want to add one?

Write a comment

Only registered users can comment. Login is sponsored by…

Vote in our Poll


The materials at this web site are maintained for the sole purpose of providing general information about fiduciary law, tax accounting and investments and do not under any circumstances constitute legal, accounting or investment advice. You should not act or refrain from acting based on these materials without first obtaining the advice of an appropriate professional. Please carefully read the terms and conditions for using this site. This website contains links to third-party websites. We are not responsible for, and make no representations or endorsements with respect to, third-party websites, or with respect to any information, products or services that may be provided by or through such websites.