The recently issued Department of Labor fiduciary rule is arguably one of the most sweeping regulatory changes in recent decades. While many continue to debate its merits or, in some cases, lack thereof, the rule succeeded in bringing the different adviser standards of care into the spotlight.
To be clear, the different adviser standards of care have been largely unchanged since the original Employee Retirement Income Security Act of 1974. These differing standards can be confusing, particularly to investors, in part because the word “fiduciary” has different definitions and requirements under the Securities and Exchange Commission and DOL. The key difference with these standards is that they are governed by different laws, despite using similar terminology. The ERISA fiduciary standard under the DOL was established by the ERISA legislation; the investment adviser fiduciary under the SEC was established by the Investment Advisers Act of 1940; and the default “suitability” standard was established by the Securities and Exchange Act of 1934 and FINRA Rule 2111.
Most notably, the new DOL rule expands the coverage of who is considered an ERISA fiduciary. While the rule includes several carve-outs and exemptions, it further broadens the fiduciary definition to include certain recommendations, in particular, IRA rollover recommendations. Gone is the prior restrictive five-point ERISA test. While a fair share of industry naysayers have spoken out about the rule, there's no denying the benefits for the average investor.
(More: The most up-to-date information on the DOL fiduciary rule)
Perhaps one of the greatest benefits of the rule is that advisers will be putting their clients' interests ahead of their own when it comes to fees and investment choices for retirement accounts. The fiduciary standard helps avoid conflicts of interest that existed in the past and aligns the interests of the adviser and the client to make the best decisions regarding retirement advice. As a result of increased transparency in fees and full disclosure on compensation, adviser trust should climb higher and investor costs are expected to go down over time.
ETHICALLY VS. LEGALLY
While a recognized legal standard that requires advisers to uphold investors' interests over their own is an achievement in and of itself, professional certification programs have long since promoted higher standards for advisers — at least at the ethical level. Ethics and certification are not inextricably linked. My intention is not to imply that ethical behavior for those with a certification is higher than for those without; I have yet to see a study with substantial data backing up any such claims. And unfortunately, we've all seen or read examples in the media that have definitively proved otherwise.
That said, most of us in the industry do acknowledge some sort of correlation between the voluntary act of pursuing a professional designation and the personal choice to adhere to a higher standard of advice than what is legally required.
Many of the top investment professional designations require advisers to act in a fiduciary capacity when offering financial planning advice — not just retirement advice. Each certification varies by program, but a common theme runs through: Professionals who earn and maintain these rigorous certifications are ethically required to work in the client's best interest at all times. These ethics go above and beyond what the DOL fiduciary rule has put forth.
Certified financial planner professionals who provide financial planning services must abide by the fiduciary standard as defined by the CFP Board. The CFP Board actively supports the adoption of a uniform fiduciary standard for both investment advisers and broker-dealers. Although the effort remains stalled with the SEC for now, the CFP Board believes a uniform standard should be no less stringent than the existing fiduciary standard for investment advisers.
The chartered financial analyst program run by the CFA Institute is backed by a robust set of codes, standards and guidelines, all with the goal of putting client interests first. All CFA Institute members and program candidates are required to follow the ethics code and standards of professional conduct. Much like the CFP Board, the CFA viewpoint includes a single fiduciary standard for those providing personalized investment advice to retail investors that is at least as stringent as that required by the Investment Advisers Act of 1940.
The Investment Management Consultants Association provides advanced education for investment and wealth professionals and offers two certifications: certified investment management analyst and certified private wealth adviser. All CIMA and CPWA professionals must adhere to IMCA's nine-principle “Code of Professional Responsibility,” which mandates placing client interests first.
ONGOING EDUCATION, ETHICS COURSES
Certificants who pursue these programs often do so to build expertise and further their credibility. Typically, to maintain a designation, ongoing education and ethics courses are required to ensure a high level of knowledge and competency for holders.
Whether an adviser has pursued a certification for additional knowledge of investment management, career advancement/satisfaction or to build client service practices, these programs have acted as an unofficial stand-in to help fill the standards gap.
The DOL fiduciary rule moves the investment advice model in the right direction, but certifications have provided measures to enhance the fairness and integrity of financial services for years — and will continue to do so now and in the future.
John Nersesian is a managing director at Nuveen Investments and former chair of the Investment Management Consultants Association.
