FINANCIAL REGULATORY REFORM AND FIDUCIARY RESPONSIBILITY

As I begin preparing this newsletter, we are one day removed from the passage by Congress of historic financial regulatory reform.The jury will be out for some time regarding the effectiveness of its many provisions.In many cases, broad discretionary authority is given to existing regulatory agencies such as the SEC and Federal Reserve, while also creating additional bureaucracy, in particular, a consumer protection agency.

One important provision is the potential imposition of a fiduciary standard to all brokers who give personalized investment advice.Essentially, a fiduciary standard requires that the investment advisor must always place the clients' best interest first along with minimizing costs and providing transparency for all activity in the portfolio.After completing a six month study that examines existing regulation for brokers and investment advisors, the SEC may choose to implement new procedures to close perceived gaps.

As most investors are painfully aware, the decade that began in 2000 produced negative annual returns in the stock market, the worst ten year performance in generations.Adding to investors' angst was a loss of confidence in Wall Street institutions due to questionable ethics and conflicts of interest as well as the disclosure of high profile scandals such as the Madoff debacle. As a result, there has been a consumer driven demand for transparency of all portfolio activity, a focal point of fiduciary responsibility.

This fiduciary standard has already implemented in one of the largest segments of the investment universe, qualified retirement plans, and, in particular, 401(k) plans.As 401(k) plans proliferated following the demise of defined benefit pension plans, many insurance companies and mutual fund companies jumped at the opportunity to significantly increase assets under management that these fledgling plans offered.With wide disparities in pricing, brokers or investment advisors would often opt for the plan that paid the highest compensation whether or not it was in the best interests of the client.The exponential growth in the number and size of these plans over the past 15-20 years resulted in fierce competition among 401(k) vendors leading to fee compression. Furthermore, many savvy plan trustees began to insist that all expenses be transparent along with a demand for an educational process that assisted participants in their investment choices.These developments have culminated with the assignment of a fiduciary standard to all those responsible for the management of 401(k) plans.

As a result of the attention directed to a code of ethics, perhaps the fastest growing certification sought by investment advisors is the Accredited Investment Fiduciary (AIF®).This distinction demonstrates to the public the importance the advisor attaches to fiduciary responsibility.In order to earn this designation, the advisor must complete a course, pass an exam and continually display the integrity required of a fiduciary when dealing with appropriate investment clients.I am pleased to announce that I achieved this designation in April.

Whether or not the SEC decides to impose fiduciary standards on a broader segment of the investment industry, it should have little bearing on my investment management.This standard was instituted for all of my accounts many years ago.While I am not technically required to act as a fiduciary on many of the accounts I manage, all portfolios are treated equally and are rendered the same professional independent advice with complete transparency.In my meetings and discussions with you, I hope that I have succeeded in demonstrating my adherence to this principle.As the investment world continues to be monitored and made more accountable, my affirmation to this standard should add to the comfort level of every investor.As long as the bureaucracy does not impose procedures that would be cumbersome and counter-productive, I am clearly in favor of this continuing trend.

I hope you are enjoying the summer.

Best Wishes,

Clifford L. Caplan, CFP®, AIF®

In the News: In April, I was quoted by the Associated Press in an article regarding appropriate investment allocations to real estate.This article appeared in the New York Times and Boston Globe, among other newspapers.More recently, On June 28th, I was interviewed and quoted in the Boston Business Journal in an article titled “Independent Streak Goes through Ranks of Advisers”.