Walking the Walk

“The history is important here,” he said. “The FPA’s ‘victory’ enabled brokers to claim they had a fiduciary duty, but it was/is only part time: It didn’t, and still doesn’t, apply when they are ‘selling’ products. The SEC was actively redefining ‘best interest’ to mean simple disclosure of conflicts. And the Dodd-Frank mandate for a fiduciary duty for brokers had been turned into greater scrutiny for RIAs.”

In fact, what happened next was a classic case of the old business adage “Agree to anything, but have your lawyers draw up the contract.” The securities industry happily backed a fiduciary duty for brokers and then lobbied for rules to be written so that it could continue business as usual.

The only solution that Knut and some others could see was to create a permanent legal entity to advocate for a full-time fiduciary standard for all retail advisors. So, they formed the Institute for the Fiduciary Standard (or IFS) in 2011 to fight for a best-interest standard.

“We advocated, of course, but soon focused more on research and education to help fill a knowledge gap. The indispensable role of ‘free speech’ is clear — not so much for ‘fiduciary duties,’” he explained.

A Simple Solution

But creating the best practices was only the first step. As the securities industry, CFP Board and others have demonstrated, anyone can claim to be a fiduciary acting in their clients’ best interest. But how can clients know their advisors are actually doing it?

Identifying advisors who are — or are not — acting in their clients’ best interests is no easy matter. It requires either massive enforcement staffs (SEC and FINRA), relying on client complaints and other agency enforcement actions (the CFP Board), or expensive and timely civil lawsuits under the ’40 Act.

Consequently, it presents a tremendous challenge for a small, new and non-regulatory group such as the IFS. I mean, how in the world are they going to determine whether advisors who say they follow the best practices are really doing so?

The institute came up with, dare I say, a brilliant solution. “We were at an institute board meeting, talking about the alternatives for creating a strong incentive to comply with the best practices, and kept coming up with things we couldn’t or didn’t want to do,” Knut said. “And then someone said, ‘Why don’t we just have them put the best practices on their Form ADVs?’ The room got quiet, and we knew we had a solution.”

The ingenuity of the ADV solution is twofold. First, all the IFS has to do to affirm compliance is to look at the ADVs posted on advisors’ websites. As for verifying actual practices, I’m reminded of a presentation I once heard by securities attorney Brian Hamburger of MarketCounsel: “If you put something on your ADV — say, that you’ll rebalance your clients’ portfolios every quarter — and you don’t do it and you get sued, you will lose. Period,” he said.

By requiring that advisors commit to best practices on their ADVs, the IFS has effectively enlisted the courts, SEC and FINRA as its enforcement arms. As I said, brilliant.

Knut pointed to the benefits of being a best-practices advisor: “The program restores a commonsense meaning of ‘advice.’ It provides true fiduciaries with a platform to help lead the movement for professional advice. It separates advice from sales, providing investors with a way to evaluate and screen advisors. And, it provides true fiduciaries with a straightforward way to differentiate what they do from what others say.”

— Read CFP Board’s Proposed Fiduciary Standard: Too Weak, Too Strong or Just Right? on ThinkAdvisor.