Tue, January 18, 2011

GAO Report Identifies Consumer Protection Issues In the World of Financial Planning

The GAO’s report to Congress, “Consumer Finance: Regulatory Structure for Financial Planners Is Generally Comprehensive, but Consumer Protection Issues Remain” is the first time a fully-independent government study of financial planning services. 

The existence of several different regulatory regimes for investment and insurance advice has been identified as a source of confusion for consumers.  For example, the Consumer Federation of America conducted a financial services survey last year which found that more than 90 percent of investors think that “a stockbroker and an investment adviser (who) provide the same kind of investment advisory services … should have to follow the same investor protection rules” and that insurance agents selling investments should be fiduciaries.  The study was motivated by concerns over the fact that while state and federal regulations govern investment advice, “financial planning” per se is not specifically regulated.  Some financial planners function as fiduciaries, but many do not.  Thus it’s possible, for example, for someone who is essentially a salesperson to give planning advice that may not be in a consumer’s best interest. 

Although the GAO did not recommend the creation of a new regulatory regime, its report did note three specific consumer concerns:

“…consumers may be unclear about when a financial planner is required to serve the client’s best interest, particularly when the same financial planner provides multiple services associated with different standards of care.”

“…financial planners can adopt numerous titles and designations, which vary greatly in the expertise or training that they signify, but consumers may not understand or be able to distinguish among them.”

“…the extent of problems related to financial planners is not fully known because SEC generally does not track data on complaints, examination results, and enforcement activities associated with financial planners specifically, and distinct from investment advisers as a whole. A regulatory system should have data to identify risks and problem areas, and given that financial planning is a growing industry that has raised certain consumer protection issues, regulators could benefit from better information on the extent of problems specifically involving financial planning services.”

The report also made some specific recommendations:

• That the National Association of Insurance Commissioners (NAIC), “take steps to assess consumers’ understanding of the standards of care with regard to the sale of insurance products, such as annuities, and take actions as appropriate to address problems revealed in the assessment.”

• That the Securities and Exchange Commission direct various regulatory offices to:
“Incorporate into SEC’s ongoing review of financial literacy among investors an assessment of the extent to which they understand the titles and designations used by financial planners and any implications a lack of understanding may have for consumers’ investment decisions.”
“Collaborate with state securities regulators in identifying methods to better understand the extent of problems specifically involving financial planners and financial planning services, and take actions to address any problems that are identified.”

The report at least recognized the problems inherent in having individuals who function under rather loose standards of competency and ethics giving financial advice to unwary consumers.  We can hope that it will be enough to motivate existing regulators to make the changes needed to provide consumers of financial products with clarity and protection.  The SEC is presently working on a “Standards of Care” study that examines whether broker-dealers, currently regulated under a “suitability” standard, should be held to a fiduciary standard.  The SEC’s report is due to be released this Friday.