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July 01, 2013 at 09:41 AM
The debate over the fiduciary standard that will become applicable to many financial professionals may be coming to a head as the looming deadline for comments on SEC proposals has motivated some advisors to express disapproval over a perceived weakening of the potential standard. Because a heightened fiduciary standard could increase advisors’ compliance costs, while simultaneously increasing consumer confidence in the quality of their advice, it is critical that advisors know the rules of the game. Recent indications that the SEC may deviate from its previously expressed intent to expand the traditional standard applicable to investment advisors, however, represent a curveball for advisors who are not currently subject to a strict fiduciary standard; the outcome once again seems up for grabs.
Today’s bifurcated approach to fiduciary regulation
Under the current regulatory regime, investment advisors governed by the Investment Advisers Act unquestionably owe their clients a fiduciary duty of care that requires the advisor to make recommendations that are in the client’s best interest, even if they are not in the best interest of the advisor.
Insurance producers and many other financial professionals, on the other hand, are governed by a less stringent suitability standard that is slightly less concrete. The suitability standard requires that the advisor have a reasonable basis for recommending products to the client based on an examination of the client’s financial position. While the suitability standard requires that advisors act fairly in dealing with clients, it is not as taxing as the fiduciary duty imposed upon investment advisors, and the resultant liability for failing to comply is less clearly defined.
SEC proposals indicate possible softening
Though many believed that the fiduciary duty of care owed by investment advisors would be expanded to cover financial professionals currently governed by the suitability standard under the Dodd-Frank Act, the SEC’s recent releases have indicated that it may be pulling back from this expansion. Many advisors and advisor groups have expressed disagreement with recent SEC pronouncements because they appear to eliminate or weaken the requirement that all financial professionals governed by the common standard act in the best interests of their clients when providing financial guidance.
