As the National Association of Insurance Commissioners considers amending the model suitability regulation, and as the U.S. Securities and Exchange Commission considers adoption of a parallel best interest proposal, the FACC Campaign finds certain misconceptions have taken root that must be addressed to ensure the ongoing debate is conducted based on facts and sound reasoning rather than preconceived notions or inaccurate assumptions.
Misconception Number 1: Best Interest is a lower standard than fiduciary duty.
Neither “fiduciary duty” nor “best interest” are defined terms as such. However, there seems to be a perception that the best interest standard being proposed for agents or brokers would be a lesser standard than the fiduciary obligation imposed on investment advisers or other established fiduciaries such as corporate directors, lawyers, and guardians. The fact is that best interest is at the heart of fiduciary duty and the two concepts are inseparable.
The SEC’s own website states that “as an investment adviser, you are a fiduciary to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide advice in your client’s best interests.” SEC Chair Jon Clayton is quoted as saying “we’ve called it the best interest standard, but I want to be clear — for broker dealers there are core fiduciary principles embodied in that best interest standard. In fact, those fiduciary principles are, I believe, the same as fiduciary principles that are embodied in the investment adviser standard.”
Best interest does not lie somewhere between suitability and fiduciary duty as some suggest. Best interest is a fiduciary standard, embodying concepts of loyalty and prudence which the Labor Department (DOL) sought unsuccessfully to apply to agent and broker recommendations.
The SEC best interest proposal would have the same effect of turning brokers into quasi-fiduciaries contrary to decades of common law as explained in the 5th Circuit decision striking down the DOL rule. While it is true the SEC proposal recognizes that agents and brokers provide transaction-based services whereas advisers have ongoing monitoring obligations, that is merely a functional difference, separate and apart from the legal standard applicable to recommendations which is the core substance of fiduciary duty.
Semantics do not alter the analysis. The SEC refrains from defining best interest in its proposal, inviting debate over whether best interest equates to fiduciary duty, but in the end canons of construction dictate the words “best interest” will mean the same thing whether applied to advisers or brokers. Meanwhile several NAIC proposals avoid the term “best interest” but say an agent must place consumer interests ahead of agent interests. These formulations boil down to “best interest” because mandating that consumer interests come first is the crux of best interest carrying with it duties of prudence and loyalty, all of which may seem appealing but would cripple agents from selling products under legal standards historically reserved for fiduciaries.
Misconception Number 2: More disclosure is not enough.
A common refrain in the best interest debate is more disclosure is not enough to address concerns about agent conduct. But the precise nature of those concerns remains elusive and nobody can say with certainty that better disclosure would be insufficient to address concerns about misalignment of agent and consumer interests. Increased transparency has always been a powerful weapon in addressing sub-optimal behavior in free markets and is especially relevant here where room exists for enhanced disclosure of compensation and conflicts of interest.
Concerns propelling the best interest debate began with the DOL fiduciary rule but remain ill-defined as applied to annuities. Other than general criticism about agent compensation and variable annuity product fees, nobody has openly stated which annuity sales are bad and which should be stopped by adoption of a best interest standard. Absent any identified wrongdoing, it is unclear how adoption of an abstract best interest standard would change agent behavior for the better or result in a different mix of product recommendations, whereas enhanced disclosure is a sure way to empower consumers and improve marketplace transparency.