With all of the recent discussion about the standards of conduct for financial professionals, it is important to remember that there is one legal standard that has required professionals to act in the best interest of their clients for more than 75 years: the fiduciary standard under the Investment Advisers Act.
Investment advisers' relationships with their clients is one of trust and confidence. For that reason, advisers are considered to be fiduciaries. They are required to act in their clients' best interests and not place their own interests ahead of their clients'.
That's exactly the standard of conduct that Americans who are saving for retirement, education, home ownership and other important life goals expect to receive from their financial professional, regardless of whether that professional or firm is registered as an investment adviser or broker-dealer.
Investors must be able to rely on sound, unbiased advice from financial professionals to achieve their goals. They deserve and expect advice that is in their best interest. But most investors don't know that only investment advisers are bound by the fiduciary standard, and they don't know how to distinguish different types of financial professionals from one another.
The Securities and Exchange Commission is attempting to address this mismatch with a bundle of proposed rules aimed at increasing investor protection, reducing investor confusion and raising the standard of conduct for broker-dealers serving individual clients. We commend the SEC for undertaking this crucial, if thorny, task. And we are committed to working with the regulators in an effort to ensure that, in their final form, the new rules will accomplish those goals. To that end, we submitted a robust set of comments and recommendations on the proposal, two of which we'll highlight here.
First, while the general principles proposed by the SEC in Reg BI (shorthand for "Regulation Best Interest") to raise the standard of conduct for brokers are appropriate, we are concerned about potential gaps in investor protection based on the overly narrow scope and application of the proposed standard.
Reg BI would require broker-dealers to act in the best interest of their retail customers, but only when making a recommendation of a securities transaction or investment strategy. Even if a broker-dealer agreed to provide a retail customer with ongoing advice or account monitoring, Reg BI would not apply to those services. In contrast, the fiduciary duty under the Advisers Act is overarching and applies to the entire relationship between an adviser and his or her client.
Thus, the statements made by some groups that claim that Reg BI would create a
"higher standard" for brokers than exists for advisers are misplaced. Retail investors should expect that a standard of conduct designed to protect their best interests — like the fiduciary standard — would apply not only to a specific recommendation, but also to account monitoring and other investment advice they receive from a financial professional.
Some commenters have focused on language in Reg BI that would require broker-dealers to disclose and mitigate, or eliminate, certain conflicts, arguing that investment advisers must only disclose conflicts under the Advisers Act. They are wrong. For starters, the disclosure proposed by Reg BI stops short of the full and fair disclosure required of advisers.
But more importantly, providing investment advice as a fiduciary under the Advisers Act goes beyond disclosure of conflicts of interest. The advice must also be in the client's best interest. While full and fair disclosure is an important component of an investment adviser's fiduciary duty, an adviser cannot let its conflicts of interest taint its investment advice.
Furthermore, it is crucial to remember that these are two distinct business models with different types of conflicts and compensation structures. A broker's commission-based compensation and incentives are geared to selling products. Rebranding commissions as "pay as you go" advice does not change that basic model. Indeed, brokerage firms may engage in sales contests and other high-pressure sales incentives, which the proposals would still allow. Investment advisers provide ongoing investment advice, and their compensation structure — typically a percentage of the client's portfolio value — is far more closely aligned with their clients' interests.
Second, while we appreciate the commission's focus on increasing transparency around the services provided and fees charged by financial professionals, we have serious concerns that the relationship summary —
Form CRS — the SEC has proposed to achieve this goal will not provide investors with an accurate and understandable snapshot of their relationships with such professionals. We have provided the SEC with an alternative disclosure document that we believe will be more effective. We strongly urge the SEC to conduct robust investor testing on this alternative, along with Form CRS.
The SEC should continue to focus on matching actual practices of financial professionals with investor expectations as it moves forward with its rule-making package. Regardless of the outcome of this crucial initiative, the investment adviser fiduciary standard will continue to provide strong, ongoing and overarching protection to investment advisory clients, just as it has for the past 75 years.
(More: SEC advice rule contains a huge hole)
Karen Barr is president and CEO of the Investment Adviser Association.
