The Financial Services Institute (FSI) has become, in essence, the red-headed stepchild in the fiduciary debate among advisory trade groups. FSI believes the Securities and Exchange Commission (SEC) should craft a new “universal” fiduciary standard for brokers and advisors, instead of putting brokers under the fiduciary standard as set out in the Investment Advisers Act of 1940.
I caught up with Dale Brown, president and CEO of FSI, by phone in early September to delve into more detail about why FSI believes a new “universal fiduciary standard of care” is warranted, and to gauge whether the FSI has made any strides in convincing the SEC to heed its advice. FSI represents independent broker-dealers as well as individual BD representatives.
In its August 30 comment letter to the SEC regarding how the regulator should go about requiring brokers to adhere to a fiduciary duty, FSI wrote that “attempting to solve the inconsistencies in the competing standards of care by transferring the standards and requirements developed over decades for investment advisers to the broker-dealer world–a world that has its own history, business practices, and clientele–is fraught with difficulty.”
It is a mistake to assume, the FSI continued, “the existing investment adviser case law can be easily translated into clear conduct rules for broker-dealers and registered representatives. Simply imposing the amorphous standard of care and other Adviser Act requirements on broker-dealers and registered representatives would subject these firms to tremendous uncertainty as to their compliance obligations. Firms cannot control costs if they do not know what is expected of them. As a result, we would expect firms to react to the imposition of the Adviser’s Act standard by limiting their services to investors who offer significant profit potential thereby reducing investor access to products and services.”
Industry trade groups as well as advisors, broker-dealer reps and insurance agents had until August 30 to voice their opinions to the SEC about how–or if–a fiduciary standard should be applied to brokers before the regulator’s study of the issue officially got under way. Advisory and consumer trade groups also joined forces to make sure the SEC got to hear what investors want regarding a fiduciary standard.
Investors Still Confused on Fiduciary
One of those messages came in mid-September: The Consumer Federation of America (CFA), American Association of Retired Persons (AARP), the Investment Adviser Association (IAA), the CFP Board, and the North American Securities Administrators Association (NASAA) released survey results that confirm, once again, that the majority of investors are confused about which type of advisor is required to act as a fiduciary on their behalf, and that the majority of investors believe all financial professionals providing investment advice–including insurance agents–should be held to a fiduciary standard.
The telephone survey of 1,319 investors conducted between August 19-23 found that nine out of 10 U.S. investors (or 91%) believe a stockbroker and an investment advisor who provide the same kind of investment advisory services should have to follow the same investor protection rules.
“Investors don’t understand the difference [between advisors and brokers] because the differences no longer make any sense,” says Barbara Roper, director of consumer protection for the Consumer Federation of America (CFA). “Investors view [advisors and brokers] as indistinguishable; the clear conclusion is that you have to regulate them accordingly, and that means applying the Advisers Act fiduciary duty to their advice and recommendations about securities.” Roper says the survey results will be formally submitted to the SEC, and individual copies will also be sent to SEC Chairman Mary Schapiro and the SEC Commissioners.
The survey also found that 97% of the investors polled said a financial professional who is providing advice should put the clients’ interest ahead of their own, and should be required to disclose up front any fees or commissions they earn and any conflicts of interest they have. Ninety-six percent of poll respondents also agreed that the fiduciary requirement should extend to insurance agents selling investments.
The investor survey will catch the attention of the SEC. But let’s hear more about FSI’s position from Brown.