Cheers to the new year and another chance for us to get it right.” That quote, while attributable to Oprah Winfrey, expresses what SEC commissioners must be feeling about their fiduciary rule making.
The Securities and Exchange Commission has been trying for four years to decide how — or even whether — to extend fiduciary accountability to brokers who provide advice to retail investors. As we enter a fifth year of uncertainty, it's worth stopping to reflect on where things stand and what the future may hold.
Despite the inability of the SEC to act on what would be the most significant fiduciary rule-making action of the millenium, some big changes in the broader regulatory and competitive environment have been under way.
FIDUCIARY TRENDS
Three overarching trends look to shape the fiduciary environment going forward. First, the standards of care for brokers and investment advisers are converging, despite inaction at the SEC. Second, regulators are ramping up their enforcement capabilities to become much more effective and efficient in protecting investors. And third, as the overall number of advisers continues to fall, demand for personalized advice will increasingly favor those who possess special skills and professional credibility.
Inaction by the SEC has perpetuated the nonsensical and unstable situation in which brokers and advisers both provide advice but are subject to different standards. But the marketplace is dynamic. Evidence of investor preference for objective advice, the persistent outflow of advisers from transactional broker-dealers and the wealth of information now available to investors to evaluate investment recommendations have forced the financial services industry to voluntarily adopt processes traditionally associated with a fiduciary standard of care.
Likewise, the Financial Industry Regulatory Authority Inc., being a self-regulator that is closely tied to the industry, has advantages over the SEC to see clearly what is happening in the marketplace and act. Closeness to the industry is not necessarily a good thing when it comes to investor protection, but in recent actions, Finra has clearly raised the bar for broker conduct. Finra has strengthened its suitability rule, provided strong guidance on avoiding or mitigating conflicts of interest and now refers to fair dealing in terms of serving investors' best interests.
TECHNOLOGY
Improved enforcement through the use of technology is likely to perpetuate that momentum. Finra and the SEC are moving forward with systems to gather, analyze and act on data gathered from financial institutions. This will make it possible to uncover improper conduct at the firm and adviser level far more quickly, effectively and economically than ever before. Not only will the new technological capabilities serve to ferret out bad actors, it will help uncover products and institutional practices (such as conflicted compensation systems) that are fundamentally at odds with serving investors' best interests.
Technology also is behind a trend toward fewer, more specialized advisers. The rise of the robo-adviser has become possible through the development of algorithms to assist investors with common financial decisions, along with the growing availability of data to feed those algorithms. Investors with straightforward financial situations and/or an inclination to be self-reliant will be able to use technology-driven solutions to manage their financial affairs independently or with “second opinion” input from others (investment professionals or not).
These three trends create a more challenging environment for advisers — broadly higher standards of professional conduct, tighter regulatory enforcement and more-intense competition. They also work to improve investor protection by demanding greater accountability and professionalism from advisers.
RAPID MARKET EVOLUTION
As we watch and wonder whether the SEC finally will act on a fiduciary rule in 2015, it's worth taking stock of the trends established during the regulator's prolonged deliberation. Many of the same reforms that would be required by the SEC's fiduciary rule making have been occurring organically. This is a case study of how the market rapidly evolves and regulators plod along behind, struggling to keep up.
Blaine F. Aikin is president and chief executive of fi360 Inc.
