Since the Investment Company Act and Investment Advisers Act, the U.S. Securities and Exchange Commission has required organizations engaged primarily in investing and trading stocks to provide full disclosure about theirinvestment objectives, while minimizing conflicts of interest. Since then, disclosure has been a prominent tool in the investor-protection arsenal of regulators around the world. Unfortunately, though, as many regulators have found, clear and proper disclosure doesn’t always produce the desired result of protecting retail investors as they navigate a world of increasingly complex financial products.
Evidence of Comprehension - How Do You Know When An Investor Understands? And How Much Does It Matter?
In an earlier blog, "The DoL Fiduciary Rule: How does investor comprehension fit in?", I explored both the written and implied requirements in ERISA and the DoL rules related to disclosures and the need to ensure that investors understand.This blog explores the question of ‘how do you know’ that an investor understands?
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On April 4, the U.S. Labor Department announced it was extending the applicability date for its controversial Fiduciary Rule. The Rule would require advisors to retirement investors to place their clients’ interests ahead of their own, and to charge no more than reasonable compensation for their services. As of this writing, the 60-day extension means the Rule will now take effect on June 9, 2017, instead of April 10. This will allow time for the Labor Department to review whether it would limit access to retirement information and advice
In the meantime, a number of opponents are pursuing lawsuits to kill the Rule completely. While rulings to date have generally favored the Fiduciary Rule, legal maneuvers will no doubt continue. But for many firms, it won’t matter – they’ve either already left the market, or already spent millions preparing for the original April 10 implementation date.
The relationship between financial advisors and their customers can be complicated. And just like any relationship, trust must be built between the two parties for the whole thing to work. Investors must trust that the advisor understands their situation and goals, has disclosed the rules of engagement, and is working in their best interest. The advisor trusts that the investor not only received but understands the disclosures associated with risks, terms, expenses, fees, and how returns are calculated. In general, consumers assume that the advisor is acting in a fiduciary manner – in their best interest – with a duty to disclose and a duty to ensure comprehension.