Fiduciary: Contentious, unsettled

Earlier this month I participated in the Fiduciary Leadership Summit hosted by TD Ameritade Institutional, which brought together investors, regulators, legislative staff members, financial service company leaders and representatives of professional associations to discuss the future of fiduciary regulations governing the delivery of investment advice. Much of the discussion focused on the two most persistent topics of the past several years: Will the Securities and Exchange Commission use its authority under Dodd-Frank to extend the fiduciary standard to all those who provide personalized advice to retail investors? And will the Labor Department re-release its expanded definition of who is an ERISA fiduciary? The pervasive view was that the outlook remains contentious and unsettled. I have come to three conclusions about where the fiduciary debate stands today. First, the polarized debate about what the SEC and DOL should and will do has largely obscured the fact that the post-Dodd-Frank debate has evolved from whether brokers should be accountable to a fiduciary standard to how fiduciary principles should apply to all advice providers. I do not believe it is an overstatement to say that a consensus has developed in favor of “a” fiduciary standard among thought leaders and decision makers involved in the debate over how advice providers should be regulated. I believe the major participants involved in the fiduciary debate agree with the following statements: • Investors who seek advice want the advice they receive to be competent and trustworthy. • As matters of principle, advice providers should be held accountable to duties of loyalty (a best-interests standard) and care (some level of prudence and diligence in the formulation and rendering of advice).

BROKERS' STANDARD

Second, an often-overlooked fact is that anyone (even a broker) who provides personalized investment advice to investors is subject to a fiduciary standard. This fact is generally ignored due to the SEC's failure to enforce the requirement established under the Investment Advisers Act of 1940 providing an exemption from fiduciary obligations only when the advice rendered is solely incidental to a transaction. The SEC's failure to enforce the law contributes to the confusion investors have about the different roles of brokers and advisers. Moreover, it creates a false sense of security among brokers that they do not need to understand and adhere to fiduciary principles if and when they provide personalized investment advice. The No. 1 complaint against brokers in arbitration proceedings is breach of fiduciary responsibility. The compliance risk to brokers who are not prepared to act as fiduciaries is growing. The Financial Industry Regulatory Authority Inc. has introduced new requirements that venture into the realm of the fiduciary duty of care. Finra is also prodding member firms to avoid or better manage conflicts of interest in the key areas of compensation structures, and in the design and promotion of proprietary products. Most tellingly, Finra and brokerage industry trade groups also now promote the idea of a “best-interests standard.” The fiduciary standard is a best-interests standard with the fiduciary duties of loyalty and care at its core. Brokerage industry leaders recognize the growing compliance risk that brokers acting as functional fiduciaries face. They also recognize competitive trends that are pushing in the same fiduciary direction. As Finra CEO Richard Ketchum said in an address at the Securities Industry and Financial Markets Association annual conference last year, “worry less about [the fiduciary standard from] the legal standpoint; worry more about it from a cultural standpoint.” Leading firms are taking action to shift the structure, practices and culture of their firms. Finally, the consensus view about the need for “a” fiduciary standard is only a starting point for reform. Vast differences of opinion still exist about what “the” fiduciary standard pertaining to all advice should be, or even if there should be a common fiduciary standard for both brokers and advisers. But it is a good starting point because it is one that recognizes that decisions about standards of conduct are matters of principle. Knowing the fiduciary debate is first and foremost a debate about principles is critical to being able to decide what to do to implement agreed-upon principles properly (through legislative, regulatory and cultural change, for example). Progress on the fiduciary front may be slow and arduous but it is increasingly certain. Blaine F. Aikin is president and chief executive of fi360 Inc.