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Regulation and Compliance > Federal Regulation > SEC

Knut Rostad, Fiduciary’s Long-Term Leader: The 2014 IA 25 Profile

By James J. Green

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If you want to know about the fiduciary standard, Knut Rostad’s your guy. Off the top of his head he’ll rattle off details on the Advisers Act, on past SEC rulings, on the history of fiduciary, on the dynamics within the Committee for the Fiduciary Standard or the Institute for the Fiduciary Standard, both of which he founded. He’ll give you informed insight into what the prospects are inside the Beltway for new fiduciary rules from the Department of Labor or the SEC.

So how did this mild-mannered (okay, maybe not so mild-mannered; this guy is passionate!) compliance officer for Rembert Pendleton Jackson, an RIA firm in northern Virginia, forge into the vanguard of advocating for the fiduciary standard?

He gives the credit to Don Rembert, principal of Rembert Pendleton Jackson, who “30 years ago gave up all his licenses and went with the SEC” because he believed “fiduciary was the only way to go.” It’s vintage Knut (he’s now achieved that rarefied status in the advisory world of being identified by only his first name, as is the case with “Deena” and “Harold”) to give credit to someone else while he toils industriously, if not quite in obscurity, as a fiduciary advocate with a sharp focus not only on what should be done, but what realistically can be achieved, especially in Washington.

While Rostad founded the Committee for the Fiduciary Standard five years ago at an fi360 conference, its roots can be traced back to 2005 and the National Council of Financial Fiduciaries, whose founding members included Harold Evensky, with Rostad as executive director. “The most memorable” accomplishment of the NCFF, recalls Rostad, was a public service announcement that the group put out that sought to educate clients of “advisors” that “your butcher is not your nutritionist” (a notion that Elliot Weissbluth of HighTower Advisors ran with in a 2012 animated video).

The committee “exclusively existed to promote the authentic fiduciary standard,” and with a high-powered membership that included noted advisor industry leaders like Evensky, Sheryl Garrett, Ron Roge and Deena Katz (and former IA and Wealth Manager editor Kate McBride). The positive response in Washington was almost immediate, Rostad recalled. “It was mid-July 2009, I was on vacation in Vermont, and got a call from Elisse Walter [then an SEC commissioner] to talk to her about the authentic fiduciary standard. That was the beginning.”

Then, Rostad said, “over the next two years the committee was extremely active visiting with the SEC staff, with Chair Schapiro” and other commissioners to talk about “the authentic fiduciary standard.” To the committee, “it became apparent early on that the fiduciary standard as we understood it was a materially different variety than the standard being expressed by SIFMA or FSI.” By October of that year, “SIFMA explicitly said their standard was the strongest in the land. They were contesting that this little upstart group was asserting that SIFMA’s standard was not authentic. They mentioned us by name, so we were being taken seriously.”

Should The SEC Even Promulgate a Fiduciary Standard?

Prospects for imposing a fiduciary standard began to look rosier over the next few years, but the realistic Rostad said that over the last six months there has appeared “greater clarity in which direction the SEC was heading,” and for Rostad, “it’s not an optimistic picture.” As of an early April interview with Investment Advisor, he said that in fact, “it may not be in the investors’ best interest that the SEC continue with its rulemaking; it’s not a good direction for investors.” Beginning some 15 months ago, he started to believe that fiduciary advocates might want to “reformulate our strategy because there’s a good chance that we’re losing with the regulators and in the public square.” He said that “barring an unforeseen and dramatic change in thinking, investors would be better off if we didn’t proceed with a rulemaking” at the SEC. Any such rule from the commission as it stands now would “look like the commercial sales/suitability standard with some extra disclosure requirements. Every broker would proudly proclaim their fiduciary” bona fides, while “brokers wouldn’t have to do much different than they do now” and “investors would be far worse off.”

The Department of Labor’s fiduciary redefinition, he said, “is a different situation.” Rostad said that “when you look at research from the GAO, the picture being drawn is that many, many investors—not that they’re not being treated with a fiduciary standard, it’s worse than that: There’s not even a suitability standard being met” in providing advice on retirement plans. He cites a GAO report from March 2013 on IRA rollovers that “suggests that a suitability standard is not being met,” and references FINRA’s guidance for brokers late last year “on what their obligations were on 401(k) rollovers.”

But what about the brokerage industry warning that the new DOL definition would lead them to abandon the market, especially for smaller investors? “The brokerage industry has been claiming for decades that increased regulation would force them to abandon the marketplace,” Rostad replied, but “independent research suggests that the situation in that marketplace may be worse for investors than DOL says it is.”

The crux of the problem? What do investors, “as consumers of services, know about how much they’re paying, and what are they getting for what they’re paying?” Unlike in health care or law, “we are in a separate class where clients don’t know what they’re paying and what they’re getting—that’s also the crux of the problem in terms of restoring trust when the institute talks about the fiduciary standard.”

That’s the Institute for the Fiduciary Standard, founded by Rostad and several other industry leaders and supported by even more luminaries, as an independent “institute dedicated to benefiting investors through research, education and advocacy of the vital role of the fiduciary standard.” The Institute promotes six core duties of a fiduciary, and of those six, Rostad said “we focus on the SEC’s opinion 65 years ago that what an advisor needs to do is to overcome conflicts; the investor needs to understand what’s being recommended and what the conflict may be. These aspirational principles become very concrete when you ask” what a fiduciary duty means, and “set that against the broader picture of how often it doesn’t happen.”

Rostad finished the interview by getting philosophical. “I wonder if in our current society we’re a little too tolerant. We have to rely on ourselves and have less tolerance [of wrongdoers]. Tolerance is good, but apply it to the broad-based situation on how advisors are handling clients: our tolerance for deviating from the fiduciary standard. We’re making a mistake. Leaders among advisors need to say, ‘It’s wrong.’”

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