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y a. marie velthuizen One Uniform Standard Does Not Fit All In late March 2014, the SEC promised to speed up its decision-making process regarding the establishment of a national uniform fiduciary standard of care governing all financial advisors – registered investment advisors and broker-dealers alike. Yet not all players in the financial services industry are waiting with bated breath for this to happen. Some – particularly those identified as registered investment advisors (RIAs) – aren’t convinced that uniform standards are inherently in the best interest of investors. David Edwards, president of Heron Financial Group | Wealth Advisors, is one of those RIAs with concerns regarding the establishment of a onesize-fits-all fiduciary standard. “The nuances of the application of the uniform standard are not apparent to most Americans – or indeed to most regulators and politicians,” Edwards said, which is why he travels often to Washington, D.C. to explain the issues to members of the Senate and House of Representatives, and their staff. Financial advisors such as Heron Financial Group are regulated by the Securities & Exchange Commission (SEC) and adhere to the provisions of the Investment Adviser Act of 1940. This Depression-era federal law created a “fiduciary standard” obliging RIAs to select only the best possible investment opportunities for their clients. Broker-dealers have a different relationship with clients. Broker-dealers follow a “suitability” standard which may or may not best provide for the investment needs of the client. These advisors are governed by the Financial Industry Regulatory Authority (FIN- RA), which is a self regulatory organization (SRO) authorized by Congress – but not an official part of government. Edwards explained, “A broker-dealer can offer his client several similar investments, which may have no, minimal or high commissions. The broker dealer is NOT obligated to select the no-commission investment and indeed may recommend the highest cost op- THE SUIT MAGAZINE - JULY 2014
tion, even if that option has a lower expected return compared to alternatives, without violating the standard. A registered investment advisor MUST select the investment with the best expected return AND the least expensive cost. Generally RIA’s invest only in no or minimal cost investments and charge an overall advisory fee based on the size of assets under management – the more the assets grow, the larger the RIA’s fee. Client and advisor sit on the same side of the table.“ In Edwards’ opinion, the broker-dealer business model is adversarial to the client’s best interest because the success of the BD is based on how much commission can be charged, not how well the client’s assets grow. In what Edwards calls the “daily battle” for client assets, ever more individual brokers are moving to registered investment advisory firms. This transition of tens of billions of client investment dollars constitutes an existential threat to traditional brokers and to FINRA, which is dependent on fees from brokers to fund its operations. Edwards doesn’t hesitate to say, “The whole discussion of the fiduciary standard is not to raise broker-dealers to the standard that RIAs currently work under, but instead to ‘dumb down’ the existing RIA fiduciary standard so that broker-dealers are less disadvantaged.” “What’s good for broker-dealers is not necessarily good for average Americans,” he emphasized. What Edwards does view as beneficial for American investors is a forward looking investment philosophy. Edwards tells his clients that comparing a portfolio’s rate of return to benchmark index returns is like referencing the tachometer in your car. “The tachometer tells you what the engine is doing,” he noted, “But if you focus only that one instrument, you will crash your car. A good driver must look through the windshield down the road, monitor what is coming next and be ready to make changes in anticipation.” Edwards tells his clients that there will be scenarios during which his investment strategy will under-perform the market. In 1999 he refused to buy Internet stocks even as the NASDAQ doubled that year. “I saw a huge bubble there and did not want to have anything to do with it,” he said. “My clients thought I was an idiot,” he said with humor in his voice, “until the following year when the NASDAQ crashed 80 percent.” Edwards was perfectly happy to buy Amazon, Cisco, and EBay in 2002 because the risk/ reward ratio had tilted dramatically in his favor. Edwards believes his job to show his clients how they can realistically achieve their financial dreams - an early retirement, a second home, funding a grandchild’s medical school tuition. Edwards will take on just enough risk to achieve those dreams, but no more. He is a practitioner of “Purpose Based Asset Allocation,” which is a process of segregating a client’s assets into multiple accounts with different strategies for short, medium and long term needs. For example, if a client needs funds in a month or so for a tax payment, tuition payment or house closing, Edwards will invest those funds only in non-volatile assets like money markets and treasury bills. For long term needs such as retirement where the horizon is 5-20 years in the future, Edwards will choose volatile but higher returning assets like US and international stocks, and commodities. “Risk is not volatility – the amount that a particular asset will rise or fall on a given day,” says Edwards. “Risk is the chance money won’t be there when you need it. We can’t take any investment risk for cash payments need in the next 30-90 days, and we invest very conservatively for cash flows due in the next 3-12 months. Funds set aside for retirement MUST be invested aggressively when the client is younger to achieve the higher returns derived from more volatile securities. As the client approaches retirement, we will systematically increase the fixed income component of the portfolio – lower overall return, but less volatility.” Edwards closed by commenting, “During the financial crisis of 2008-9, there was never a moment where we had to reduce the monthly draw of our retired clients – mission accomplished!” 670 West End Avenue 14th Floor New York, NY 10025 Toll-free (800) 994-3766 Local (347) 580-5280 www.HeronFinancialGroup.com THE SUIT MAGAZINE p.65
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Issue 61 JULY 2014 exclusive interv
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