I distinctly remember sitting in a crowded New York City restaurant somewhere near Times Square in the fall of 1993, with then CFP Board CEO Bob Goss and Board chair Tom Potts. I was a senior editor at Worth magazine then, and Goss, a lawyer, was explaining the Board’s “two hat” rule: CFPs were required to act in the interests of their clients when they were acting as financial planners, but were not required to do so when they were acting as brokers (the legal term for this, he said, was “the scope of the engagement”).
I’d been covering financial planners for over a decade by then, but this was first I’d heard of this loophole, and I remember thinking: “There’s not one client in a thousand who will understand how this works.”
Forward 20 years to Melanie Waddell’s story last week, Will the SEC Create Two Kinds of Fiduciaries?, in which she explores the very real likelihood that the Commission will ultimately come out with a separate “fiduciary” standard for brokers. Separate, that is, from the ‘40 Act standard that RIAs are currently held to. Not only would two standards undermine the intent of Dodd-Frank, it would make the problem it’s trying to solve worse, instead of better.
In her story, Melanie quotes a “who’s who” list of SEC watchers, including Brian Graff (executive director of the American Society of Pensions Professionals and Actuaries, the ASPPA), David Tittsworth (executive director of the Investment Adviser Association, the IAA), Jeff Brown (senior VP of legislative and regulatory affairs for Schwab), and Duane Thompson (senior policy analyst at fi360), all opining that the likelihood of two fiduciary standards is anywhere from “possible” to “exactly what the SEC will do.”
Should the SEC come out with a double standard, it wouldn’t be entirely the Commission’s fault.
Congress, in its infinite wisdom, wrote in Dodd-Frank Section 913 that should the SEC write a fiduciary standard for brokers, it must be “uniform” for both brokers and RIAs, and “no less stringent” than the existing ‘40 Act standard; while, at the same time, not make “receiving commissions” or “the sale of proprietary products” a violation of the fiduciary standard.
How’s that supposed to work? Good question.
Back in 2010, not long after Dodd-Frank was passed into law, the CFP Board came out with a pretty persuasive paper detailing how one might write disclosures for commissions and proprietary products that would pass a fiduciary test (see my Feb. 1, 2011 blog“An Old Dog Learns Some New Tricks).
While I, and many other observers, see little chance that any actual disclosures would be written with the same explicitness, the bigger problem is that allowing the charging of commissions and the sale of proprietary products is by definition “less stringent” than the current standard. So the SEC can’t win either way.
Unfortunately, the real losers from a fiduciary double standard will be retail investors, whom the Dodd-Frank Act was intended to protect. As the SEC’s Investor as Purchaser Subcommittee recently wrote in its report on the broker-dealer fiduciary duty: “Investors typically make no distinction between broker-dealers and investment advisers, and most are unaware of the different legal standards that apply to their advice and recommendations…Investors may be harmed if they choose a financial adviser under a mistaken belief that the financial adviser is required to act in their best interest when that is not the case.”
Creating two fiduciary standards would do nothing to reduce the current state of investor confusion. On the contrary, it would no doubt make the situation even more confusing.
Under a double fiduciary standard, brokers will undoubtedly be legally allowed to advertise that they, too, are fiduciaries for their clients (the implication being they are the same as RIAs), when in fact they won’t be subject to the same standard and likely would continue to wear Bob Goss’ “two hats.”
The result will be less investor protection—not more.