A January paper released by the Institute for the Fiduciary Standard detailed regulatory and fiduciary issues on the table in 2016: the Department of Labor's fiduciary rules for IRA advisors; the Securities and Exchange Commission's fiduciary standard for brokers; the CFP Board's announced review of its best interest standard for financial planners; and the Institute's own "Best Practices for Fiduciary Financial Advisors" white paper.
In the paper, titled "Fiduciary Duties Advanced in 2015; 2016 Will Reveal How Much these Gains Are Secured — or Not," Knut Rostad, president of the Institute, wrote that "a key issue in 2016 will be defining a best interest standard and the appropriate stringency of fiduciary duties."
Whether or not you believe any of these initiatives will come to a conclusion in the coming year, there is at least the potential for significant gains — or further erosions — in investor protections. In his paper, Rostad put it this way: "The debate over if fiduciary duties should prevail is over. The battle over what fiduciary duties prevail rages on."
Rostad added, "This battle will shape the future of advice, and its outcome is uncertain, despite […] the compelling case for 'trusted advice' found in history, law, research and common sense."
Of course, it's what industry advocates do say that concerns Rostad and many others. As usual, the powerful (and well-funded) brokerage industry has done a masterful job of getting its message across: in this case, persuading many members of Congress and the media of the lunacy of expanding fiduciary protections to the clients of retail brokers, both in the case of IRAs and in general.
Rostad makes a powerful case that these self-serving contentions are largely unfounded and, more importantly, provides intellectual ammunition for client-centered advisors and other fiduciary advocates to set the record straight — and, hopefully, to increase investor protections.
Rostad rightly refocuses the debate on investors' best interests, a subject that is often lost in the flood of financial industry rhetoric. "Fiduciary status exists to mitigate the information asymmetry between providers and consumers of socially important services that entail a high level of complexity. The stringency of fiduciary duties increases with the risk these relationships present to investors," he wrote.
He added that fiduciary relationships between consumers and professionals in law, medicine or finance "serve to protect consumers [who are] unable to protect themselves." As such, fiduciaries' services are "'socially important,'" and "investors have a basis to entrust their fiduciary with power."
To demonstrate the importance of fiduciary duties in personal finance, Rostad cited a 2008 RAND Corporation paper titled "Investor and Industry Perspectives on Investment Advisors and Broker-Dealers," which found that nearly two out of three (63%) focus-group participants "believed that brokers are required by law to act in the client's best interest." What's more, after having the differences explained to them, "investors are often unable to tell whether their own financial professional is a broker or an advisor."
Given investors' widespread lack of understanding about the differences between types of financial advisors, it's not much of a surprise that the securities industry's and the SEC's preferred remedy of disclosure isn't very effective. Rostad cited a 2012 SEC study conducted by branding agency Siegel and Gale on the effectiveness of client disclosures, which found that 56.9% of respondents who recalled receiving a conflicts of interest disclosure from their advisor said they fully understood the potential impact on their advisory relationship, and only 55.2% took any action.
He then details the attempts of the financial services industry to misdirect the current conversation away from investors' best interests. "Industry advocates, of course, do offer arguments to oppose fiduciary duties for brokers rendering advice," he wrote, noting their central argument is an economic one, as "increased costs will force broker-dealers to abandon smaller accounts."
However, Rostad said those economic arguments "have been roundly refuted [while] industry advocates do not refute the case for fiduciary duties."
One of the challenges to those economic arguments comes from Barbara Roper, director of investor protection for the Consumer Federation of America. In a comment letter submitted last year to the DOL on its conflict of interest rule, she cited numerous examples where brokerage fees exceed those of independent advisors:
