The SEC’s Study on Investment Advisers and Broker-Dealers, released to Congress in January, has by now been digested by the legions of followers on 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, executive director of the Investment Adviser Association, an advocacy group for registered investment advisors. 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 read “Reaction to SEC’s Fiduciary Study Is Entwined With Politics,” on Advisorone.com, or visit www.AdvisorOne.com/SECandtheFiduciaryStudy.)
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 pro-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.