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June 07, 2013 at 09:56 AM
Establishing a harmonized fiduciary standard for registered investment advisors and broker-dealers, the focus of a current SEC study, sounds fine in theory. All other considerations aside, who could argue with mandating a single standard of care for all investment advisors, irrespective of their professional status?
The problem lies in “all other considerations.” RIAs and broker-dealers operate according to different models, one of which (the former’s) lends itself well to a fiduciary standard. That of the latter would be upended by having to jettison the current suitability standard governing broker-dealers, requiring their FINRA-registered reps to comply with new regulatory requirements for which they’re ill-suited.
One reason: A fiduciary standard would be problematic for reps, most especially career agents, who source product primarily (if not exclusively) from a single carrier. That makes demonstrating that they’re acting in the client’s best interest—a requirement of a fiduciary standard—more difficult. Add to this the fact many reps derive compensation only from commissioned-based sales and the challenge becomes all the greater.
Moving to a harmonized standard would ultimately expose B-Ds and their reps to increased legal liability, driving up rates for errors and omissions insurance and, thus, the cost of doing business. The result would be an exodus of registered reps from the field—leaving an even greater share of an already underserved middle market without a financial service professional to help them with basic planning needs.
The deadline approaches
On July 5, the Securities and Exchange Commission will have completed a 120-day review of responses to request for comment, pursuant to Congress’ authorizing (but not requiring) the SEC to impose a harmonized fiduciary under the Dodd-Frank Act of 2011. This review may have to factor in a proposed Congressional amendment to Section 913 of the Dodd-Frank Act of 2010. Before proposing a revised fiduciary standard, the SEC would be required under the legislation to demonstrate that existing dual standards are economically harmful to investors. The SEC would also be mandated to coordinate with other federal agencies, among them the Department of Labor, which is drafting its own fiduciary standard for retirement plans subject to ERISA law. One fear of advisors: that the new DOL standard would eliminate commission-based compensation, forcing registered reps to move to a fee-only model.
That would be disastrous. For evidence of this, consider the experiences of advisors overseas. As I reported in an exclusive from the Million Dollar Round Table’s annual meeting in Anaheim, Calif., last year, the U.K. is witnessing a significant exodus of agents — estimates put the figure at 50,000-plus — as a result of legislation that went into effect on January 1 of this year.
Dubbed the Retail Distribution Review, the legislation imposes new educational requirements on advisors. The law also affects commissions: Advisors will only be able to accept fee-based compensation on new business. In respect to existing business, clients must be given the opportunity to discontinue renewal commissions if they believe they’re not receiving adequate advice or service.
