A leading Wall Street trade organization is encouraging financial firms to put their clients' interests ahead of their own when providing retail financial advice.
On Thursday, the Securities Industry and Financial Markets Association
released a document designed to educate investors and outline the rights they have when working with financial advisers. Written directly to consumers as its audience, the paper states that they should “receive personalized investment advice about securities that is in your best interests.”
“This is a commitment we're making to our customers because we put our customers first,” SIFMA chief executive Judd Gregg said in a speech at the National Press Club in Washington. “We're going to align our efforts with the purposes of the people we serve and of a good society. The financial industry is going to work to be an extraordinarily strong and positive force for helping our customers pursue their dreams … [and] help America succeed and Main Street prosper.”
The brochure also states that clients have a right to be informed about material conflicts of interest that a broker faces and a right to be clearly informed about fees associated with their investment accounts.
It, however, does not mention the term “fiduciary duty.” Under current law, investment advisers must act in the best interests of their clients, or meet a fiduciary standard. Brokers adhere to a less stringent standard that allows them to sell investment products that suit a client's investment goals and risk tolerance, but have higher fees attached than other products on the market.
SIFMA is encouraging the Securities and Exchange Commission to propose a rule that would establish uniform fiduciary duty for anyone providing retail investment advice – a move that it has the authority to make under the financial reform law. SIFMA also stresses that the regulation must accommodate the broker business model.
In a question-and-answer session after his remarks, Mr. Gregg demonstrated the nuances of the fiduciary debate. SIFMA has argued that brokers should not be subject to the fiduciary-duty rules that currently govern investment advisers.
“Fiduciary relationships have all sorts of legal implications that would limit in many ways the ability to give advice in a constructive way or not allow it at all,” said Mr. Gregg, a former Republican senator from New Hampshire.
But when it comes to legalities, brokers are not required to disclose all of their conflicts nor do they have to act in their clients' best interests, according to Barbara Roper, director of investor protection at the Consumer Federation of America.
“Investors could be confused [by SIFMA's initiative],” Ms. Roper said. “They could be led to believe that they're entitled to protections they're unlikely to receive at many brokerages. It could create unrealistic expectations that put an investor at risk.”
Another fiduciary advocate was cautious about the SIFMA initiative.
“Aspirationally, it looks very interesting,” said Knut Rostad, president of the Institute for the Fiduciary Standard, who attended the National Press Club luncheon. “But without any verification or validation, it's not clear what these rights mean.”
In an interview after his speech, Mr. Gregg said, “Using the term 'fiduciary' has a lot of legal connotations that have built up over the years. It's a word that isn't the best to use to describe what we're doing.”
He called “misguided” a Labor Department rule that would expand the definition of “fiduciary” as it applies to anyone providing investment advice to retirement plans. He said that it would drive brokers out of the business of advising 401(k) plans and individual retirement accountholders. It was originally proposed in 2010 and may be re-launched in a couple months.
The Securities and Exchange Commission is considering whether to propose its own fiduciary-duty rule that would raise investment-advice standards for brokers.
