August, 2010
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

The DODD-FRANK Wall Street Reform and Consumer Protection Act was signed into law on July 21st. The bill read over 2,000 pages and according to a Wikipedia note, creates “243 rules, conduct 67 studies, and issue 22 periodic reports.” There are several important sections that will interest you:

  • Bank accounts in FDIC insured banks were insured in the past for $100,000 and that was temporarily increased during the financial crisis to $250,000. This new law makes it official that the $250,000 insured limit is now permanent.
  • Hedge funds and private equity advisors will be required to register with the securities and exchange commissions and disclose to the commission information such as investment positions and the amount of leverage involved.
  • Credit rating firms, which were criticized for being too lax in their evaluations of securities based on subprime mortgages will be subject to oversight by the SEC.
  • Banks will be required to hold additional capital to cover potential losses.
  • Banks will be more limited in their ability to engage in proprietary trading in their own accounts, which could represent a conflict of interest with their responsibility to their clients.

In addition to the items above, and most importantly, the new law authorizes the SEC to conduct a six month study on the impact of changing the current “suitability standard” to a “fiduciary duty” for broker-dealers.

Broker-dealers (stock brokers and insurance agents) are now only obligated to meet a “suitability standard” that requires them to offer “suitable” investment advice to clients. These industries have fought for years to maintain the “suitability standard” as the primary rule for all of their sales representatives because it allows them to have a lot of latitude as to what products they sell their clients and the compensation they receive for doing so.

Registered investment advisory firms, such as Castle Investment Advisors® , are already required by the SEC and have a “fiduciary duty:” to do what is best for each and every one of their clients, as do doctors and attorneys. Compensation paid to a registered investment advisory firm is clearly spelled out in their contracts and most firms in this industry work very hard to maintain their fiduciary obligations to their clients.

The results of the study on the impact of adopting a stricter fiduciary standard for broker-dealers are practically a foregone conclusion. Here a few predictions:

  • The general population does not know the different between broker-dealers (with a “suitability standard”) and registered investment advisors (with a “fiduciary standard”).
  • Many clients who deal with broker-dealers through stockbrokers and insurance companies are sold products under the suitability standard rules that are not appropriate for that client.
  • A higher percentage of satisfied clients are working with registered investment advisory firms rather than broker-dealers.
  • Registered investment advisory firms have less client turnover.
  • Fees paid by clients are usually lower when they are working with registered investment advisors.

Once the six months study is complete and the results are published it will be interesting to see if the “suitability standards” that apply to broker-dealers will be modified or not. Expect the broker-dealer industry to fight hard to keep the status quo.

Our comprehensive financial planning industry is now 40 years old and for all of those years those of us with a “fiduciary duty” have pushed for more protection for all consumers. The debate over fees versus commissions receives more sunlight every year. More articles and reports are being written every year about 12(B)1 fees, trailing commissions, back end fees, and other forms of compensation.

Hopefully this new bill and the six month study by the SEC will keep the spotlight on the importance for all consumers to understand the difference between “suitability standards” and “fiduciary duty” to all clients. We will continue to watch what happens in Washington with the SEC and with Wall Street and will update you again once the study has been completed.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit, call 1-888-849-9559 or e-mail Gary directly at .