In testimony before
SIFMA’s testimony states that “the central imperative of a fiduciary is putting investors’ interests first. A fiduciary should also act with good professional judgment, and avoid conflicts of interest, if possible, or otherwise effectively manage conflicts through clear disclosure and, as appropriate, investor consent.” It sounds good, at first glance, but it falls far short of the authentic fiduciary duty that applies to investment advisors.
Then it becomes clearer why: they appear to think that they are already acting as fiduciaries under the commercial standard. Nothing could be further from the truth. SIFMA says: “We note that broker-dealers are already subject to and operate under many core fiduciary principles, including the following which are memorialized under current FINRA rules: just and equitable principles of trade; suitability of recommendations; best execution of transactions; fair and balanced disclosure to investors; supervision; and training.”
On that list, only “best execution” is a fiduciary characteristic shared with investment advisors who are bound by an “authentic” fiduciary standard, which encompasses the “five core fiduciary principles,” according to The Committee for the Fiduciary Standard:
? Put the client’s best interests first;
? Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
? Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
? Avoid conflicts of interest; and
? Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.
SIFMA’s testimony is crafted to make it look as though it is promoting an actual fiduciary standard of conduct for its members–B/Ds and registered representatives. However, when one looks at the testimony, the hearing itself, news reports and a Wealth Manager Webinar on October 7 with Kevin Carroll and Knut A. Rostad, it is clear that there is little fiduciary conduct in their interpretation of their “federal fiduciary standard.” This editor is a member of The Committee for the Fiduciary Standard.
Kevin Carroll is a managing director and associate general counsel at SIFMA–the Securities Industry and Financial Markets Association. He is the staff advisor to SIFMA’s Litigation Advisory, Arbitration, and Private Client Legal Committees. Carroll was an assistant director in the Enforcement Department of NASD, now FINRA, before he joined SIFMA.
Knut A. Rostad is the regulatory and compliance officer at the RIA Rembert Pendleton Jackson (RPJ), and chairman of The Committee for the Fiduciary Standard. As a contributing editor to Wealth Manager, Rostad writes the Regulatory Reason blog.
No one questions the fact that the functions of investment advisors and broker/dealer registered representatives have in some very important ways become identical. Both routinely give financial and investment advice to clients. What is still different, however, is that investment advisors are regulated by the Securities and Exchange Commission and the Investment Advisers act of 1940, while broker/dealers and registered reps are regulated under The Securities Exchange Act of 1934 and a self-regulatory organization, FINRA–the Financial Industry Regulatory Authority.
What’s more: titles have merged, with both B/D registered representatives and investment advisors often calling themselves financial advisors or counselors or consultants. Those titles confuse investors, especially since there is typically no reference to a broker/dealer’s sales function–indeed, it specifically sounds as if the broker’s function is an advisory one.
And, perhaps most important: according to the SEC’s Rand Report–its study of “Investor and Industry Perspectives on Investment Advisers and Broker-Dealers,” investors typically assume that the advice they get from a registered rep., or an investment advisor is coming from a person who must put their client’s interests first–but only the investment advisor is, by law, held to the fiduciary standard, requiring them to put investors’ interests first.
Now I am not picking on broker/dealer registered representatives here. I was one, long ago, (and then a trader and then an advisor), and I understand that many registered representatives hold themselves to a higher standard than the suitability standard, and put their client’s interests first as a practice. But a broker holding oneself to a higher standard than suitability, without regulation and/or law backing that up, does not give the investor the protections afforded by the current investment advisor’s fiduciary duty.
No one is saying that broker/dealers should be eliminated–not by a long shot–or that compensation must be in the form of a fee. The important distinction here is that, if broker/dealers are not going to label a salesperson a salesperson, but they are going to give advice in the identical role as an investment advisor, then by law and/or regulation, the advice givers should be regulated in the identical way–and, many will say, by the same regulator. It follows then, that since there is already established, centuries-old law regulating fiduciary conduct–the conduct that governs investment advisors now–that this should be the standard that governs advice from registered representatives as well.
A path to fiduciary
Yes, there are many practical aspects to consider on the path to fiduciary duty to clients by broker/dealers: compensation; principal trading; proprietary products; self-directed brokerage; capital raising activities, among others. However these and more are being actively discussed, in detail, at the regulatory and legislative levels, and from what I have heard firsthand in these discussions, these challenges can be resolved.
I find it helpful to look back at how centuries of fiduciary law were interpreted by the Supreme Court in perhaps the most important case governing fiduciary conduct by investment advisors since the Investment Advisers Act of 1940. Here is link to the full Supreme Court opinion, with a long excerpt below:
Securities and Exchange Commission v. Capital Gains Research Bureau, Inc., et al. Supreme Court of the United States 375 U.S. 180 (1963):