Blog

Dollars and cents is what the investment industry often uses to make a case of getting good advice. This usually influences the investor, whether institutional or individual, because he or she thinks it’s all about the numbers.

The numbers are critically important. Investment performance, risk and fees are represented using numbers which are the basis for decisions.

But what about professionalism?

The term ‘advisor’ is used by many different types of individuals, however it is not backed by universal standards of practice, training, transparency, ethics or sufficient regulatory oversight. Pretty much anyone can call him or herself an advisor.

It’s no wonder that we regularly hear stories of abuses and fraud. In the extreme, advisors are cheating their clients through illegal actions like lying or outright theft. But more often it’s about the so-called ‘advisors’ whose practices result in huge investor losses, without breaking any laws. These are the insidious cases where the investments are presumed ‘suitable’ for the investor, but are certainly not in his best interest.

These cases are increasingly being reported in the mainstream press. The New York Times ran a story in October about a retired couple that was paying $26,000 per year in investment fees and didn’t realize their ‘advisor’ was not held to a fiduciary standard.

So sadly, as Chip Roame of Tiburon Strategic Advisers puts it, ‘The whole industry is evil…you are lumped in with Madoff’. Excellent advisors therefore need to take decisive measures to demonstrate trust with their clients. They need to prove their professionalism, transparency and oversight in meaningful ways.

 The CEFEX-certified advisor does exactly this.

 The CEFEX-certified advisor adheres to a standard of fiduciary excellence published by fi360, Inc. a leading training and resource company in Pittsburgh. The standard is based on the best fiduciary practices exhibited by advisors, and substantiated by law and regulation, including the Investment Advisor Act of 1940 and the Employee Retirement Income Security Act (ERISA).

Adherence to the fiduciary standard is verified through independent annual audits. The idea of independent oversight is not new. The Securities & Exchange Commission (SEC) has performed surprise examinations of advisors for decades. The SEC’s objective is simple: to protect investors. Today, the SEC examination program is approximately at a 13-14 year inspection cycle, which is clearly too long. Legislative efforts to either create a Self Regulatory Organization (SRO) to oversee investment advisors or to impose user fees to pay for the exams have gone nowhere in Congress.

So the requirement for oversight is understood, but is not sufficiently in place, except for CEFEX-certified advisors. These firms undertake their own oversight voluntarily. They have an independent Accredited Investment Fiduciary Analyst® (AIFA®) audit their fiduciary practices annually with an on-site visit biennially. This includes a detailed review of investments and client files. Think about it: if you or your own organization has ever been audited, you can appreciate the level of accountability this creates.

 Benefits to the investor.

CEFEX-certified advisory firms have documented and structured processes. This is a requirement of certification, and will more likely result in investment portfolios which will perform better. They will be better designed and have lower costs, because structured due diligence processes force rational investment selection, thereby ensuring the best value for the portfolio. Also, documented and repeatable processes are more likely to generate higher returns over time, because they aren’t dependent on timing, luck, ‘in-fashion’ or un-substantiated decisions.

CEFEX-certified advisory firms can deal with a wide range of investment conditions. Their investment process is not hostage to market swings because their process anticipates all types of conditions and can rationally account for investment outcomes. The prudent process also means that fewer mistakes will be made. A well-structured process can virtually eliminate deficiencies in portfolio management, because decision rules would not allow it.

It is this commitment to a prudent process which fosters a culture of continuous improvement at the advisory firm. With an AIFA checking in each year, the firm remains on the hook to maintain excellent fiduciary processes and address opportunities for improvement. Ultimately it guarantees a level of professionalism within the firm.

Invested assets are definitely shifting towards the registered investment advisor, and CEFEX advisors are growing at twice the pace of their counterparts. The shift is unstoppable because the objective is altruistic: to best serve the institutional and individual investor. So while investors will continue to scrutinize the dollars and cents of financial advice, they must also demand the highest level of professionalism associated with that advice. The CEFEX-certified advisor is committed in this regard.

Please visit www.cefex.org/advisor for more information on this program.

 

 

 


PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/info-disclosure/. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.