CLIENTS’ TRUST MAKES US DIFFERENT

How did your investments do in last week’s stock market crash? If you lost more than 7% because of bad advice from your broker or financial adviser, did you know you may have a legal right to compensatory damages in a court of law? Hi, I’m Larry Lawyer, and I help my clients get what they’re due under the law. If you think you received bad financial advice, call me at 1-800-LAWYERS for a no-obligation consultation.”

Sound unbelievable? Think again.

Just when this bull market has made some 100 million Americans pretty happy investors, the laws defining the responsibilities of those rendering financial advice have been updated.

The new Uniform Prudent Investor Act, passed in 1994 and adopted in nearly half the states, has fundamentally altered the standard for responsible investment management. When the market decline comes, we’ll see how well the financial advisory industry has kept pace.

The act reflects many of the developments we consider instrumental to effective investment advice and management. For example, the new rule embraces modern portfolio theory and evaluating portfolios in their entirety relative to the established risk/return objectives.

The new law also shifts the criteria for the “prudent” investor from the results of our investment management to the processes and procedures we use to make investment decisions. It’s the facts and circumstances when investment decisions are made that are important, not how those decisions look in hindsight.

This new emphasis refocuses attention on the fiduciary responsibility financial advisers inherently assume — and how we must conduct ourselves as prudent investors.

As Callen Associates consultant Don Trone has written, this conduct at a minimum must include the following steps:

* Prepare written investment policies and document the investment decision process.

* Diversify assets in accordance with risk/return objectives.

* Use professional money managers to make decisions.

* Control and account for all investment expenses.

* Monitor money managers and service providers.

* Avoid conflicts of interest.

The key features are clear. Chief among them is loyalty: “A trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.” The National Conference of Commissioners on Uniform State Laws comments about the duty of loyalty: “The duty of loyalty is perhaps the most characteristic rule of trust law, requiring the trustee to act exclusively for the beneficiaries, as opposed to acting for the trustee’s own interest or that of third parties.”

Where does this place the registered rep? Can there be any real question as to whether registered reps who call themselves “financial advisers” and who assist clients in asset allocation, mutual fund selection and ongoing performance reporting will be considered fiduciaries?

A fiduciary is one who must “act in a professional capacity of trust and render investment advice.” How does this co-exist with the registered rep’s duty to his broker-dealer?

What distinguishes registered investment advisers from registered reps — legally, operationally and culturally — is our professional capacity of trust with our clients, trust that is simple and understood. Our capacity is not challenged by a legal and ethical obligation to a broker-employer.

The new law’s impact hasn’t yet been tested in the marketplace. But one thing is clear: We cannot assume we won’t see TV ads offering our clients a lawyer’s promise “to get what you’re due under the law” from bad financial advice.

Donald M. Rembert is a certified financial planner and managing principal of Rembert D’Orazio & Fox in Falls Church, Va.