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Industry Spotlight > Broker Dealers

Reform Debate on Fiduciary Standard for FAs Heats Up

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The House of Representatives has begun floor debate today on Rep. Barney Frank’s (D.-Mass.) proposed comprehensive plan for financial- services reform.

Perhaps the most controversial aspect of the bill would require brokers, and any other financial professionals holding themselves out as advice-givers, to adhere to a fiduciary standard similar to that of registered investment advisors.

The fiduciary standard dictates a relationship of trust, embracing due care, loyalty and good faith. Under current law, brokers are not required to register as RIAs and are therefore not subject to the fiduciary standard.

The Senate has also published a reform plan, proposed by Sen. Chris Dodd (D.-Conn.); but it won’t be close to voting stage until January 2010 at the earliest. As to the fiduciary standard issue, the Senate plan is tougher.

The biggest controversy — and the subject of a red-hot industry debate — is whether brokers would be required to adhere to the identical principles-based standard of care that RIAs are held to under the Investment Advisers Act of 1940 or to a weaker fiduciary standard.

Currently brokers are held only to a rules-based suitability standard.

“This will be the single biggest change in financial services for the retail investor in 70 years. If it gets passed as a substantive requirement, it will dramatically change the culture of the whole financial services world for the better,” says Harold Evensky, principal, Evensky & Katz, and who serves on the steering group of the Committee for the Fiduciary Standard, an organization that advocates for an authentic, undiluted standard for brokers.

Last week, the SEI Advisor Network and the committee released the results of a survey of 890 RIAs and brokers to determine the level of support for and understanding of the fiduciary standard.

“What screams out is that in agreeing that they should be held to a fiduciary standard, a majority of brokers said they want greater regulatory oversight. This is in contrast to the longstanding resistance of the industry [firms],” says Knut A. Rostad, the committee’s chair and regulatory-compliance officer of the RIA, Rembert Pendleton, Jackson.

In the poll, more than half the brokers and 86 percent of advisors said they believe that all financial professionals who give investment and financial advice should be required to meet the fiduciary standard. Further, the survey found that a majority of brokers (61 percent) and a significant majority of RIAs (89 percent) were against being permitted to ask clients to waive the fiduciary standard.

The battle over the fiduciary issue pits several large firms, some independent broker-dealers and various trade associations and lobbyists. Groups such as the Securities Industry & Financial Markets Association (SIFMA) and the Financial Services Institute (FSI) either oppose the fiduciary standard or advocate for a new standard.

Those supporting the full standard include the Financial Planning Coalition; fi360, whose goal is to promote a culture of fiduciary responsibility; the Committee for the Fiduciary Standard; and the Consumer Federation of America.

The committee and others worry that a new, or so-called “harmonious” standard, would be a lower standard.

Those who oppose a move to mandate that brokers be held to an undiluted fiduciary standard maintain that doing so would mean fewer product choices for investors.

“That’s a bunch of b.s.” says Sheryl Garrett, founder of the Garrett Planning Network and a member of The Committee’s steering group. “But, yes, it’s true that we’d eliminate the real [crappy], expensive things and only offer the better ones. The average citizen gets very little objective advice. This legislation would increase that, because advisors would be required by law to do what’s in the client’s best interest.”

This Wednesday, the Committee for the Fiduciary Standard is meeting in Washington with SIFMA and FSI “to try to understand their issues and see whether there is a meeting of the minds,” says Evensky. “There may be concerns and fears that are unfounded.”

The two congressional bills under consideration differ substantially vis-?-vis the fiduciary standard.

The Senate bill proposes “to sweep everything under the Investment Advisors Act with the existing fiduciary standard,” says Kristina Fausti, fi360′s director of legal and regulatory affairs.

“The broker-dealer side, especially, isn’t happy with that,” Fausti says. “It would [repeal] the so-called broker exemption, and brokers would be required to register as investment advisors — therefore the fiduciary standard would apply to them.”

The Senate bill would throw out the “Merrill Lynch” rule, which permits brokers to give advice without having to comply with a fiduciary standard.

“It’s a nonsensical concept that someone can waive a fiduciary standard,” says Evensky. “You can’t waive trust. If you provide advice, you best be prepared to stand behind that advice.”

The House bill would not do away with the broker-dealer exemption but would give the Security and Exchange Commission (SEC) more power in rule-making to extend the fiduciary standard.

For RIAs, requiring brokers to be held to the fiduciary standard would bring greater competition. “It’s fair to say it would be supporting the creation of more advisors directly competing against the RIAs,” says Rostad.

According to Garrett, “the overwhelming majority of independent advisors is very much in favor of, or not directly opposed to, the change in law.”

Holding brokers to a fiduciary standard would mean additional regulations and, indeed, more complex ones.

“Many of the products would have to change in order for them to meet the fiduciary standard of care,” says Blaine Aikin, president-CEO of fi360 and a member of the committee’s steering group. “It takes away some of the conflicts of interest inherent in the products. It would also be a big change in culture.

“The broker-dealer community, in finding investments suitable to the client, has operated with incentive compensation; and there is also a contractual obligation to the employer,” he says. “That’s a divided loyalty, which is different from the singular duty of loyalty that comes from operating as a fiduciary.”

Advocates for the fiduciary standard insist that most clients erroneously assume that brokers are conducting business under the fiduciary standard.

“But that’s not what the law is now,” says Evensky. “Firms’ advertisements say, ‘We’re going to wrap our arms around you and help you plan the rest of your life.’ It sounds pretty comforting. We’re just saying that it ought to be real.”


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