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Products & Compensation Still Biggest Conflicts for FAs

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The industry needs to do a better job educating both advisors and investors around products, as well as reviewing how advisors are compensated in order to avoid conflicts of interest, according to FINRA’s chief officer.

In a world filled with product offerings, the industry still has a long way to go when it comes to understanding and disclosing the details around products FINRA’s chairman and CEO Rick Ketchum said Tuesday during SIFMA’s Annual Meeting. During a recent study on conflicts of interest at broker/dealers, the self-regulatory agency still saw issues around how advisors are investing clients in products.

“We should be about not only about identifying situations and rule violations, but also get out and look at how industry is handling areas where the most difficulties over the past ten years,” Ketchum says.

The big issue for firms around conflicts continues to be products, Ketchum says. On a whole, firms do a great job vetting products, but the roll out process, sale, quality of disclosure, quality of understanding and training from standpoint of advisors, quality of communications and advertisements and understanding of negative scenarios by investors all need work.

“This is something well worth focusing on,” Ketchum says. These issues still have a long way to go before firms can call it a success and they deserve serious consideration, he added. I’d be really focused on communication with customers and focus on concentrated positions that customers really don’t understand the risk on now.”

Compensation was another conflicts issue Ketchum highlighted. The industry needs to take steps to make that a more balanced process, without the level of incentives currently seen at some firms is important. But that doesn’t necessarily mean going to a complete advice-based model without commissions. 

“If you can’t describe in a paragraph why that’s in the best interest of the customer, it should send alarm bells off in the firm,” he says.

“No, I don’t think the world can completely move to advice, in fact, I think many investors will be poorly served if it does,” Ketchum says. “But I do think that trying to control and trying to make as much product agnostic as possible the decisions being made by your advisors is a really good idea.”

Ketchum instead noted that avoiding conflicts comes at a foundational level, it’s in the very fabric of a firm’s culture. “I’ll leave to the SEC the determination of  if/when you get subjected to its fiduciary standard on the broker/dealer side, but from your code of ethics, from a cultural standpoint with respect to any person who touches a client, it is time to make that standard from an ethics standpoint and best interests of the customer,” Ketchum says.  “Worry less about the legal standard, worry most about it from a cultural standpoint.” 

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