The debate on whether all financial advice givers — including registered representatives of broker-dealers — should be required to operate under a fiduciary standard has been long and contentious.
Many groups have responded to the SEC’s March 1 request for information (RFI) on the topic — one of the key issues still unresolved in implementing the Dodd-Frank Act.
Among those in favor of a single fiduciary standard for all advice givers is the Investment Company Institute. It said in its comment to the SEC: “ICI continues to support the SEC staff’s 2011 recommendation that the SEC adopt a fiduciary standard of conduct for broker-dealers when they are providing personalized investment advice about securities to retail investors that is no less stringent than the fiduciary duty that applies to investment advisers.”
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The FPA, NAPFA, NASAA, the CFP Board, the IAA, AICPA, Fund Democracy and the Consumer Federation of America filed a jointly signed comment which said in part: “We support the SEC staff recommendation in its Section 913 Study to adopt parallel rules under the Advisers Act and the Securities Exchange Act of 1934 establishing an overarching fiduciary duty that is identical for brokers and advisers, but only if, as the Dodd-Frank Act mandates, it is no less stringent than the existing standard under the Advisers Act.” The IAA filed a separate comment letter, in which it wrote: “We continue to maintain that all persons providing investment advice about securities to clients (regardless of the level of the client’s sophistication) should be subject to the same high standard of care — the well-established fiduciary duty standard under the Advisers Act,” but also expressed its concern that the SEC “appears to be approaching its initial consideration of the uniform standard of conduct and other regulatory harmonization from the perspective of applying broker-dealer rules to investment advisers, while only sparingly mentioning the possibility that investment adviser regulation should apply to brokers that provide advice. We would oppose wholesale application of “check-the-box” broker-dealer regulation to investment advisers.”
The Institute for the Fiduciary Standard, in its comment filed today by Knut Rostad concludes that “The SEC is poised to neuter the fiduciary standard. The RFI assumptions categorically reject basic fiduciary principles and, instead, set out the basis for a lower commercial sales standard. If the SEC proceeds to embody these assumptions in rulemaking, it would reject decades of precedent, research findings and expert opinion.”
Among those who have argued against extending the SEC’s current fiduciary standard to brokers are the Financial Services Institute (FSI), which in a comment on another Dodd-Frank implementation wrote: “we urge the SEC not to lose focus on the important need of harmonizing regulatory requirements as well, as it progresses forward on the fiduciary duty.”
The National Association of Insurance and Financial Advisors (NAIFA) argued that “the imposition of a fiduciary standard on registered representatives would likely result in a shift from middle- to higher-income clients, increased costs, and limitations on the product options offered.”
Individuals of note who have filed comments with the SEC on the issue include John Bogle who said, “What today’s ‘new’ mutual fund industry needs, more than anything else, is a clear affirmation of the fiduciary standard that was specified in the 1940 Acts.”
Luke Dean, a professor of financial planning at William Patterson University in New Jersey, said in his comment letter: “In 1940, when the integrity and ethical standards of an individual “professional” were much higher than they are today… our forefathers had the foresight to create the Investment Advisers Act of 1940, which in effect, created a fiduciary requirement for any “advisor” to actually give advice that is in the best interest of the consumer.”
But what about individual advisors? What is their opinion on a fiduciary standard? Here is a compilation of RFI comments made by advisors, most of whom are registered investment advisors.
Evensky & Katz
Coral Gables, Fla.
Although I also understand the reluctance to impose unnecessary and potentially costly regulatory standards, I believe that this framing, focused on protecting existing business models instead of protecting the public, results in a myopic focus that will leave the investing public at a significant disadvantage.
The Family Firm
My letter addresses just one aspect of the fiduciary duty, the obligation to disclose all material information, including the seller’s “financial interest” in a particular transaction. In focusing on this issue, I do not intend to imply that disclosure alone would satisfy the fiduciary duty. On the contrary, an adviser’s fiduciary obligations are far more extensive and include, first and foremost, an obligation to act in the best interests of the client.
However, disclosure of financial interest will take on increased importance if brokers and dually registered advisors are deemed to be fiduciaries…retail customers of brokers, dealers and dually registered investment advisers suffer a critical disadvantage in the advisory relationship because the broker-dealer or dually registered adviser is under no obligation to disclose his/her “financial interest” in the securities and insurance transactions1 that the customer enters into as a result of the advice received.