SEC and the Fiduciary Study, Part III: Where Do We Go From Here?

It’s not whether to extend fiduciary duty but how to extend it

More On Legal & Compliance

from The Advisor's Professional Library
  • Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors.  When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
  • Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.  

The SEC’s Study on Investment Advisers and Broker-Dealers, released to Congress Friday night, is now being digested by the legions of followers of both sides of the debate on extending the fiduciary standard to brokers who provide advice. It seems that now the debate is not about whether to extend, but rather how to extend fiduciary duty to all who advise individuals.

The landmark report to Congress from the SEC is commonly known as the Fiduciary Study—in part to keep it from being confused with the similarly named earlier study conducted by the SEC and released in early 2008—(the Rand Report on Investment Advisers and Broker-Dealers).

The question all the groups, which have different points of view, very different agendas and some that have powerful financial interests, are asking is: Where do we go from here?

As a member of the Committee for the Fiduciary Standard, and after participating in scores of meetings in Washington with regulators and legislators and their staffs, I can, while preserving the confidentiality of private meetings, and without speaking for the Committee, comment on what I see as we move ahead with what the Committee calls a ‘bold blueprint.” 

The Fiduciary Study is a powerful, “blueprint” for providing investors with more clarity about the advice they receive from their financial intermediary. But it is, in many ways unfinished.

There’s “still a lot of work,” according to David Tittsworth (left), executive directorof the Investment Adviser Association, an advocacy group for registered investment advisors (RIAs).The SEC still has to propose, receive comments on and enact rules. There will be a lot of advocacy and lobbying as that goes on. For more background on the political lay of the land, please see “Reaction to SEC’s Fiduciary Study Is Entwined With Politics,” and SEC and the Fiduciary Study, Part II: Politics and the Fiduciary Standard.

On one side, are advocates for a client-centric, fiduciary model, which places the interests of the client above the interests of the advisor and firm. This, the investment advisory model, has been very successful for 70 years. On the other side you have the firm-centric distribution “business model, which produces products and distributes them, and where currently advice does not have to be in the client’s best interest—in fact it's perfectly legal for the firm to sell products that benefit the

firm rather than the client. This model has been a financial gold mine, and the issue is that while enabling customers to buy and sell securities was the broker’s role, now that advice is being given, it is a very different ballgame. It’s the old “if it looks like a duck…,” well, it needs to be a duck.

Long-Term and Short-Term Views

In part this breaks along pro-business and pro-consumer or investor lines. But the real issue is the long-term view versus the short-term view. The long-term view is client-centric; the short-term view wants to preserve the current insurance and bank-broker product distribution business model. This model values its employees by how big a “producer” they are—how much they can sell. That’s short term.

If investors benefit from a client-centric, universal fiduciary standard, in the long run it would seem that the firms which embrace this “model” will gather more investors—and more assets. It will be a steadier flow of revenues. Investors will be able to retire more securely—something that over the long term benefits all Americans, as there will be less dependence on social programs, if Americans can save more effectively. That means, and this is part of the fiduciary standard, controlling costs. Not necessarily using the cheapest product but rather controlling costs and justifying a higher-cost product with reasons why it is in the client’s best interest. The Department of Labor says that for every 1% in higher fees, an investor’s portfolio erodes by 28% over 35 years of investing. 

Some groups have come out and voiced concerns for preserving the bank-broker, insurance-broker “business model.” The National Association of Insurance and Financial Advisors released a statement to this effect on Jan 21. SIFMA did as well.

But there seems to be a disconnect in the way BD executives think about the extension of the fiduciary standard to all who advise and what reps in the field think. In a survey SIIFMA released last fall, the focus was on three conclusions that SIFMA, many broker-dealers and insurance lobby has

talked about since the beginning of the debate. They said that investment fiduciary advice costs clients more than advice from a broker. They said that extension of the fiduciary standard to brokers would result in: less choice for investors and less access to advice. This directly contradicts the findings of a recent fi360-AdvisorOne survey.

When asked if extending the fiduciary standard would limit investors’ choice of advisor, product or service, or cost more to investors, the majority of brokers and advisors in this survey do not agree.

Would Extending Fiduciary Duty to Brokers:

1) Raise Costs for Investors?

No, the majority of respondents, 74%, do not “believe it costs investors more to work with fiduciary advisors 

than brokers when all costs to the investor (not only the advisor’s compensation) are considered.”

2) Reduce Product and Service Choice for Investors? 

No, most participants, 68.6%, say they do not “believe a fiduciary duty for brokers who provide advice would reduce product and service choice for investors.”

3) Price Some Investors Out of the Market for Advice?

No, more than two-thirds surveyed, 66.9%, do not “believe a fiduciary standard of care for brokers would price some investors out of the market for advice.”

And in late 2009, a separate SEI-Committee for the Fiduciary Standard survey found that most brokers understood and were pro the fiduciary standard. SeeBrokers and the Fiduciary Standard.”

In the months ahead, I would imagine that investor advocates and the financial services companies will continue to make their contrasting views known in comments on proposed rules and, possibly, meetings with regulators or legislators.

Much will depend on the SEC funding issue: will Congress actually provide funding that will enable the SEC to do what it is tasked with or will they continue to alternately starve the SEC for resources and pummel them when something happens that they may have caught had they had the resources? See: “Should the SEC be Self-Funded?” and “House Democrats Call for More Funding for SEC.

There is a lot to be accomplished before these rules take effect. Politics will play its part but it is good to know that the SEC has provided solid recommendations for creating a universal fiduciary standard. The SEC has taken a thoughtful, long-term approach in what it has outlined in its Fiduciary Study. Investors still distrust the investment industry. In fact, more than two-thirds, 67.3%, say a “uniform fiduciary standard for brokers and advisors would help regain investors’ confidence.” This is something the financial services industry sorely needs, and both the industry and investors would be better off for it.

For the latest news and analysis on the SEC Study releases and related developments, see:

8 Surprising Findings in the fi360-AdvisorOne Fiduciary Survey

The Fiduciary Study:

SEC Tells Congress It Will Proceed With Uniform Fiduciary Standard for Brokers, Advisors

SEC and the Fiduciary Study: The Process, Part I

SEC and the Fiduciary Study, Part II: Politics and the Fiduciary Standard

Reaction to SEC’s Fiduciary Study Is Entwined With Politics

House Democrats Call for More Funding for SEC

SIFMA Supports SEC’s Fiduciary Standard, but Concern Lingers

The SRO Study:

In SRO Report to Congress, SEC Offers Lawmakers Options for Advisor Oversight

In Unusual Move, SEC Commissioner Elisse Walter Dissents on SRO Study

Page 1 of 3
Single page view Reprints Discuss this story
This is where the comments go.